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The Origins of Firm Heterogeneity: A Production Network Approach

Author

Listed:
  • Andrew B. Bernard
  • Emmanuel Dhyne
  • Glenn Magerman
  • Kalina Manova
  • Andreas Moxnes

Abstract

This paper quantifies the origins of firm size heterogeneity when firms are interconnected in a production network. Using the universe of buyer-supplier relationships in Belgium, the paper develops a set of stylized facts that motivate a model in which firms buy inputs from upstream suppliers and sell to downstream buyers and final demand. Larger firm size can come from high production capability, more or better buyers and suppliers, and/or better matches between buyers and suppliers. Downstream factors explain the vast majority of firm size heterogeneity. Firms with higher production capability have greater market shares among their customers, but also higher input costs and fewer customers. As a result, high production capability firms have lower sales unconditionally and higher sales conditional on their input prices. Counterfactual analysis suggests that the production network accounts for more than half of firm size dispersion. Taken together, our results suggest that multiple firm attributes underpin their success or failure, and that models with only one source of firm heterogeneity fail to capture the majority of firm size dispersion.

Suggested Citation

  • Andrew B. Bernard & Emmanuel Dhyne & Glenn Magerman & Kalina Manova & Andreas Moxnes, 2019. "The Origins of Firm Heterogeneity: A Production Network Approach," CEP Discussion Papers dp1592, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1592
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    References listed on IDEAS

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    1. Ezra Oberfield, 2014. "Misallocation in the Market for Inputs," 2014 Meeting Papers 1226, Society for Economic Dynamics.
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    Citations

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    Cited by:

    1. Johannes Boehm & null null & John Morrow, 2019. "The Comparative Advantage of Firms," Sciences Po publications 2019-07, Sciences Po.
    2. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    3. Magne Mogstad & Emmanuel Dhyne & Ayumu Kikkawa & Felix Tintelnot, 2017. "Trade and Domestic Production Networks," 2017 Meeting Papers 381, Society for Economic Dynamics.
    4. Grant, Everett & Yung, Julieta, 2019. "Upstream, Downstream & Common Firm Shocks," Globalization Institute Working Papers 360, Federal Reserve Bank of Dallas.
    5. repec:anr:reveco:v:10:y:2018:p:207-236 is not listed on IDEAS
    6. repec:eee:eecrev:v:111:y:2019:i:c:p:1-34 is not listed on IDEAS
    7. Dominik Boddin & Frank Stähler, 2018. "The Organization of International Trade," CESifo Working Paper Series 7378, CESifo Group Munich.
    8. Imbs, Jean & Pauwels, Laurent, 2019. "Fundamental Moments," Working Papers BAWP-2019-06, University of Sydney Business School, Discipline of Business Analytics.
    9. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    10. Cajal-Grossi, Julia & Macchiavello, Rocco & Noguera, Guillermo, 2019. "International Buyers' Sourcing and Suppliers' Markups in Bangladeshi Garments," CEPR Discussion Papers 13482, C.E.P.R. Discussion Papers.
    11. Grossi, Julia Cajal & Macchiavello, Rocco & Noguera, Guillermo, 2019. "International Buyers' Sourcing and Suppliers' Markups in Bangladeshi Garments," CAGE Online Working Paper Series 403, Competitive Advantage in the Global Economy (CAGE).
    12. Muendler, Marc-Andreas & Rauch, James E., 2018. "Do employee spinoffs learn markets from their parents? Evidence from international trade," European Economic Review, Elsevier, vol. 105(C), pages 159-173.
    13. Emmanuel Dhyne & Glenn Magerman & Ayumu Ken kikkawa, 2019. "Imperfect Competition in Firm-to-Firm Trade," Working Papers ECARES 2019-05, ULB -- Universite Libre de Bruxelles.
    14. Julia Cajal-Grossi & Rocco Macchiavello & Guillermo Noguera, 2019. "International Buyers' Sourcing and Suppliers' Markups in Bangladeshi Garments," CEP Discussion Papers dp1598, Centre for Economic Performance, LSE.
    15. Johannes Boehm & Jan Sonntag, 2018. "Vertical Integration and Foreclosure: Evidence from Production Network Data," Sciences Po publications 2018-12, Sciences Po.
    16. Aleksandra Kordalska & Magdalena Olczyk, 2019. "What Fosters Firm-Level Labour Productivity In Eastern European And Central Asian Countries?," GUT FME Working Paper Series A 55, Faculty of Management and Economics, Gdansk University of Technology.
    17. Robert C. Johnson, 2018. "Measuring Global Value Chains," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 207-236, August.

    More about this item

    Keywords

    production networks; productivity; firm size heterogeneity;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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