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How and why do Firms differ?

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How do firms differ, and why do they differ even within narrowly defined industries? Using evidence from six high-tech, manufacturing industries covering a 24-year period, we show that differences in sales, materials, labor costs and capital across firms can largely be summarized by a single, firm-specific, dynamic factor, which we label efficiency in the light of our structural model. The model contains the complete system of supply and factor demand equations. It suggests that efficiency is strongly linked to profitability and firm size, but it is unrelated to labor productivity. Our second task is to understand the origin and evolution of the differences in efficiency. Among the firms established within the 24-year period that we consider, permanent differences in efficiency dominate over differences generated by firm-specific, cumulated innovations.

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  • Tor Jakob Klette & Arvid Raknerud, 2002. "How and why do Firms differ?," Discussion Papers 320, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:320
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    1. Katayama, Hajime & Lu, Shihua & Tybout, James R., 2009. "Firm-level productivity studies: Illusions and a solution," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 403-413, May.
    2. Hoveid, Oyvind & Raknerud, A., 2008. "Dynamics of income, wealth and capital in Norwegian farm household accounts: A state-space model," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44461, European Association of Agricultural Economists.
    3. Şeker, Murat, 2012. "A structural model of firm and industry evolution: Evidence from Chile," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 891-913.
    4. Annegrete Bruvoll & Torstein Bye & Jan Larsson & Kjetil Telle, 2003. "Technological changes in the pulp and paper industry and the role of uniform versus selective environmental policy," Discussion Papers 357, Statistics Norway, Research Department.
    5. Hans Lööf, 2011. "R&D-Persistency, Metropolitan Externalities and Productivity," ERSA conference papers ersa11p1396, European Regional Science Association.
    6. Haijime Katayama & Shihua Lu & James Tybout, 2003. "Why Plant-Level Productivity Studies are Often Misleading, and an Alternative Approach to Interference," NBER Working Papers 9617, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    efficiency; firm heterogeneity; labor productivity; intrinsic differences; firm-specific innovations; state space models; maximum likelihood.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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