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The Origins of Firm Heterogeneity: A Production Network Approach

Author

Listed:
  • Kalina Manova

    (University of Oxford)

  • Glenn Magerman

    (Université libre de Bruxelles)

  • Emmanuel Dhyne

    (National Bank of Belgium)

  • Andreas Moxnes
  • Andrew Bernard

    (Dartmouth College)

Abstract

This paper evaluates the firm size distribution and firm growth in the presence of production networks. Firms can be large because they attract (i) more suppliers and customers, (ii) larger or better suppliers and customers and (iii) find better matches along these supplier-buyer relationships. In a simple model of monopolistic competition, firms sell to other firms as well as to final demand. The model presents a decomposition of firm sizes into various structural components along supplier, buyer and match characteristics. Using unique data on supplier-buyer relationships across the universe of firms covering all economic activities in Belgium, we present three key results. First, the production network explains all of the variance of the size distribution relative to sales to final demand. Second, inter-firm demand vastly dominates the traditional productivity channel on the supply side. Third, on both the demand and supply side, the extensive margin dominates the intensive margin. In other words: firms are big because they have many rather than important customers/suppliers.

Suggested Citation

  • Kalina Manova & Glenn Magerman & Emmanuel Dhyne & Andreas Moxnes & Andrew Bernard, 2017. "The Origins of Firm Heterogeneity: A Production Network Approach," 2017 Meeting Papers 487, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:487
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    References listed on IDEAS

    as
    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. Boehm, Johannes & Dhingra, Swati & Morrow, John, 2019. "The comparative advantage of firms," LSE Research Online Documents on Economics 102596, London School of Economics and Political Science, LSE Library.
    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. Johannes Boehm & Jan Sonntag, 2018. "Vertical Integration and Foreclosure: Evidence from Production Network Data," Sciences Po publications 2018-12, Sciences Po.
    4. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    5. Magne Mogstad & Emmanuel Dhyne & Ayumu Kikkawa & Felix Tintelnot, 2017. "Trade and Domestic Production Networks," 2017 Meeting Papers 381, Society for Economic Dynamics.
    6. Aleksandra Kordalska & Magdalena Olczyk, 2020. "What fosters firm-level labour productivity in Eastern European and Central Asian countries?," Bank i Kredyt, Narodowy Bank Polski, vol. 51(1), pages 91-120.
    7. Everett Grant & Julieta Yung, 2019. "Upstream, Downstream & Common Firm Shocks," Globalization Institute Working Papers 360, Federal Reserve Bank of Dallas, revised 12 Apr 2019.
    8. Robert C. Johnson, 2018. "Measuring Global Value Chains," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 207-236, August.
    9. 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.
    10. Basile Grassi & Julien Sauvagnat, 2019. "Production networks and economic policy," Oxford Review of Economic Policy, Oxford University Press, vol. 35(4), pages 638-677.
    11. Dominik Boddin & Frank Stähler, 2018. "The Organization of International Trade," CESifo Working Paper Series 7378, CESifo.
    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. Mathias Lé & Frédéric Vinas, 2020. "The Financing of Investment: Firm Size, Asset Tangibility and the Size of Investment," Working papers 777, Banque de France.
    14. Imbs, Jean & Pauwels, Laurent, 2019. "Fundamental Moments," Working Papers BAWP-2019-06, University of Sydney Business School, Discipline of Business Analytics.
    15. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    16. 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.
    17. David Baqaee & Emmanuel Farhi, 2019. "Networks, Barriers, and Trade," NBER Working Papers 26108, National Bureau of Economic Research, Inc.
    18. 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.
    19. 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.
    20. 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.

    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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