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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. 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

    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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