Firm Age, Investment Opportunities, and Job Creation

Abstract

This paper asks whether startups react more to changing investment opportunities than more mature firms do. We use the fact that a region's pre-existing industrial structure creates exogenous variation in the severity of its exposure to nationwide manufacturing shocks to develop an instrument for changing investment opportunities, and examine employment creation in the non-tradable sector as a response to those opportunities. Startups are much more responsive to changing local economic conditions than older firms. Moreover, their responsiveness doubles in areas with better access to small business finance, suggesting that financing constraints are an important brake on job creation in the startup sector. Although we focus mostly on the non-tradable sector for empirical identification, our results extend to other sectors of the economy, indicating that the mechanisms we uncover are economically pervasive. This suggests that factors like organizational flexibility and innovativeness may be important drivers of job creation among startups.

Entrepreneurship and State Taxation

“…Consistent with the growing literature on young firm activity (Fort et al 2013;Adelino et al 2017;Decker et al 2017c;a), our results indicate that new firms are particularly vulnerable to economic shocks. New firms account for a disproportionate share of the overall response of employment growth, job creation and job destruction to changes in corporate tax rates.…”

“…To construct the creation, destruction and employment change variables, we scale levels of job creation, job destruction and employment change by the county's 2006 total employment level. This is similar in spirit to Adelino et al (2017) who scale these outcomes by a county's employment in 2000. Scaling in this way allows for job creation in a county to be comparable across time and across firm groups.…”

“…The existing stock of small businesses will mostly reflect economic developments of past years (or decades) and the exit of such small businesses often reflects lifecycle concerns of owners more than current policies. 8 Our results show that young employer firms are particularly susceptible to tax policy shocks relative to established firms, adding to existing work finding that young firms are especially sensitive to credit conditions (Fort et al 2013), demand shocks (Adelino et al 2017;Decker et al 2017c), and productivity shocks (Decker et al 2017a). In these respects, we view our contribution as an important expansion of the literature.…”

“…Specifically, we examine how entrepreneurial activity responded in counties that experienced a change in their state corporate, personal, or sales tax rates relative to bordering counties whose state did not change rates. We explicitly test for the presence of spillovers of entrepreneurial activity across borders and use a variety of specifications that exploit different levels of variation and include different measures of policies that affect the 1 See Haltiwanger et al (2013) on job creation, Adelino et al (2017) and Pugsley & Sahin (2015) on business cycles and Bartelsman & Doms (2000); Foster et al (2001;2008); Petrin et al (2011); Alon et al (2017) (among others) on innovation and productivity.…”

The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity

“…Intuitively, states are differentially affected because they rely on industries that experience heterogeneous national-level shocks. This approach to predicting local economic shocks was introduced by Bartik (1991) and Blanchard and Katz (1992) and is commonly used in the economics (e.g., Autor and Duggan (2003)), and more recently finance (Adelino, Ma, and Robinson (2017)), literature.…”