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When Industries Become More Productive, Do Firms?

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  • James Levinsohn
  • Amil Petrin

Abstract

This paper investigates two explanations for why industries might become more productive over time. The first explanation, termed the real productivity case,' is one in which firms become more productive and this leads to more productive industries. The second explanation, termed the rationalization case,' is one in which firm productivity is constant, but productive firms expand while less productive firms either shrink or exit. Each case has very different implications for factor markets, long term growth prospects, and public policy regarding productivity. Further, one can only distinguish between these two cases with plant- or firm-level data. We investigate the empirical relevance of the two cases using the Chilean manufacturing census. We find that the rationalization case explains much of the measured increase in industry productivity. When industry productivity fails, the rationalization case appears much less important. We also contribute to the applied econometric literature on productivity estimation as we show that the value-added production function is especially well-suited to a simple extension of recent methods developed by Oiley and Pakes.

Suggested Citation

  • James Levinsohn & Amil Petrin, 1999. "When Industries Become More Productive, Do Firms?," NBER Working Papers 6893, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6893
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    Cited by:

    1. Mohamed Ali Marouani & Rim Mouelhi, 2014. "Employment Growth, Productivity and Jobs reallocations in Tunisia: A Microdata Analysis," Working Papers DT/2014/13, DIAL (Développement, Institutions et Mondialisation).
    2. Kee, Hiau Looi & Hoekman, Bernard, 2007. "Imports, entry and competition law as market disciplines," European Economic Review, Elsevier, vol. 51(4), pages 831-858, May.
    3. Muhammed BENLI, 2016. "FDI and export spillovers using Heckman’s two step approach: Evidence from Turkish manufacturing data," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 315-342, Winter.
    4. KONISHI Yoko & NISHIYAMA Yoshihiko, 2013. "Decomposition of Supply and Demand Shocks in the Production Function using the Current Survey of Production," Discussion papers 13003, Research Institute of Economy, Trade and Industry (RIETI).
    5. Muhammed BENLI, 2016. "Productivity spillovers from FDI in Turkey: Evidence from quantile regressions," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 177-196, Autumn.
    6. Muhammed BENLI, 2016. "FDI and export spillovers using Heckman’s two step approach: Evidence from Turkish manufacturing data," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 315-342, Winter.
    7. Kraay, Aart & Raddatz, Claudio, 2007. "Poverty traps, aid, and growth," Journal of Development Economics, Elsevier, vol. 82(2), pages 315-347, March.
    8. KONISHI Yoko & NISHIMURA Yoshihiko, 2013. "A Note on the Identification of Demand and Supply Shocks in Production: Decomposition of TFP," Discussion papers 13099, Research Institute of Economy, Trade and Industry (RIETI).
    9. Mahmut Yasar & Philip Garcia & Carl Nelson & Roderick Rejesus, 2007. "Is there Evidence of Learning-by-Exporting in Turkish Manufacturing Industries?," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(2), pages 293-305.
    10. Sanghamitra Das & Ch. Sambasiva Rao, 2004. "Trade liberalization, imported inputs and factor efficiencies: Evidence from the auto components industry in India," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 04-05, Indian Statistical Institute, New Delhi, India.
    11. Martin S. Feldstein & Elena Ranguelova, 2002. "The Economics of Bequests in Pensions and Social Security," NBER Chapters,in: The Distributional Aspects of Social Security and Social Security Reform, pages 371-400 National Bureau of Economic Research, Inc.
    12. de Backer, Koen & Sleuwaegen, Leo, 2003. "Foreign ownership and productivity dynamics," Economics Letters, Elsevier, vol. 79(2), pages 177-183, May.
    13. Halkos, George Emmanuel & Tzeremes, Nickolaos G., 2007. "Productivity efficiency and firm size: An empirical analysis of foreign owned companies," International Business Review, Elsevier, vol. 16(6), pages 713-731, December.
    14. Okamoto, Yumiko & Sjöholm, Fredrik, 1999. "FDI and the Dynamics of Productivity: Microeconomic Evidence," SSE/EFI Working Paper Series in Economics and Finance 348, Stockholm School of Economics.
    15. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
    16. Elliott Parker & Mark Pingle, 2006. "The distributional effects of selection and capital accumulation on firm productivity under imperfect capital markets," Empirical Economics, Springer, vol. 31(3), pages 677-697, September.
    17. Johannes van Biesebroeck, 2002. "The Effect of Technology Choice on Automobile Assembly Plant Productivity," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 65-73.
    18. Jim Levinsohn & Wendy Petropoulos, 2001. "Creative Destruction or Just Plain Destruction?: The U.S. Textile and Apparel Industries since 1972," NBER Working Papers 8348, National Bureau of Economic Research, Inc.
    19. Muhammed BENLI, 2016. "Productivity spillovers from FDI in Turkey: Evidence from quantile regressions," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 177-196, Autumn.
    20. Koen de Backer, 2002. "Foreign ownership and productivity dynamics," Economics Working Papers 617, Department of Economics and Business, Universitat Pompeu Fabra.
    21. Amil Petrin & James Levinsohn, 2005. "Measuring Aggregate Productivity Growth Using Plant-Level Data," Working Papers 552, Research Seminar in International Economics, University of Michigan.
    22. Alain Gabler & Omar Licandro, 2007. "Endogenous Growth through Selection and Imitation," Economics Working Papers ECO2007/26, European University Institute.
    23. Carstensen, Vivian, 2003. "Ein einfaches Verfahren zur Berücksichtigung heterogener Preisbildung und Marktmacht auf unvollkommenen Gütermärkten in Produktivitätsschätzungen," Hannover Economic Papers (HEP) dp-273, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    24. Natalia Ramondo, 2009. "Foreign Plants and Industry Productivity: Evidence from Chile," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 789-809, December.

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