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The Origins of Firm Heterogeneity: A Production Network Approach

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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," NBER Working Papers 25441, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25441
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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. Lucie Gadenne & Tushar Nandi & Roland Rathelot, 2019. "Taxation and Supplier Networks: Evidence from India," IFS Working Papers W19/21, Institute for Fiscal Studies.
    3. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    4. Robert C. Johnson, 2018. "Measuring Global Value Chains," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 207-236, August.
    5. Egger, Peter H. & Erhardt, Katharina & Lassmann, Andrea, 2019. "Immigration and firms’ integration in international production networks," European Economic Review, Elsevier, vol. 111(C), pages 1-34.
    6. Magne Mogstad & Emmanuel Dhyne & Ayumu Kikkawa & Felix Tintelnot, 2017. "Trade and Domestic Production Networks," 2017 Meeting Papers 381, Society for Economic Dynamics.
    7. Basile Grassi & Julien Sauvagnat, 2019. "Production networks and economic policy," Oxford Review of Economic Policy, Oxford University Press, vol. 35(4), pages 638-677.
    8. 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.
    9. Cajal-Grossi, Julia & Macchiavello, Rocco & Noguera, Guillermo, 2019. "International buyers' sourcing and suppliers markups in Bangladeshi garments," LSE Research Online Documents on Economics 102612, London School of Economics and Political Science, LSE Library.
    10. David Baqaee & Emmanuel Farhi, 2019. "Networks, Barriers, and Trade," NBER Working Papers 26108, National Bureau of Economic Research, Inc.
    11. Mundaca, Gabriela & Strand, Jon, 2020. "Carbon pricing of international transport fuels: Impacts on carbon emissions and trade activity," MPRA Paper 100347, University Library of Munich, Germany, revised 19 Mar 2020.
    12. Ayumu Ken Kikkawa & Glenn Magerman & Emmanuel Dhyne, 2019. "Imperfect competition in firm-to-firm trade," Working Paper Research 363, National Bank of Belgium.
    13. Johannes Boehm & Jan Sonntag, 2018. "Vertical Integration and Foreclosure: Evidence from Production Network Data," Sciences Po Economics Discussion Papers 2018-12, Sciences Po Departement of Economics.
    14. Everett Grant & Julieta Yung, 2019. "Upstream, Downstream & Common Firm Shocks," Globalization Institute Working Papers 360, Federal Reserve Bank of Dallas, revised 12 Apr 2019.
    15. Dominik Boddin & Frank Stähler, 2018. "The Organization of International Trade," CESifo Working Paper Series 7378, CESifo.
    16. Imbs, Jean & Pauwels, Laurent, 2019. "Fundamental Moments," Working Papers BAWP-2019-06, University of Sydney Business School, Discipline of Business Analytics.
    17. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    18. Sebastian Heise, 2019. "Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence," Staff Reports 896, Federal Reserve Bank of New York.
    19. 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.

    More about this item

    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
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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