The Firm Size Distribution and Productivity Growth

Over the last 20 years, the annual average U.S. and Canadian productivity growth rates have been 2.3% and 1.3%, respectively. The objective of this paper is twofold. First, we empirically document the firm size distribution and the productivity for the two countries. Second, we quantitatively assesses how much different determinants of the firm size distribution contribute to this observed productivity difference between the two countries. For the empirical part, we show that U.S. firms are on average larger than their Canadian counterparts. This observation is particularly so in the manufacturing industry. Moreover, we show that small firms in the United States have growth rates that are higher than small firms in Canada, but larger firms in the two countries have similar growth rates. These observations suggest that small firms in the two countries may be the key source of the observed productivity growth gap. Given these observations, we build a model of firm size dynamics, which incorporates several determinants of the firm size distribution such as the tax structures and the financial market imperfections. We then calibrate the model for each country focusing on these determinants. The calibrated model is used to determine whether and how much the differences in these determinants can account for the differences in the firm size distributions and the productivity growth gap