Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory

Abstract

In this paper, we review the literature on declining business dynamism and its implications in the United States and propose a unifying theory to analyze the symptoms and the potential causes of this decline. We first highlight 10 pronounced stylized facts related to declining business dynamism documented in the literature and discuss some of the existing attempts to explain them. We then describe a theoretical framework of endogenous markups, innovation, and competition that can potentially speak to all of these facts jointly. We next explore some theoretical predictions of this framework, which are shaped by two interacting forces: a composition effect that determines the market concentration and an incentive effect that determines how firms respond to a given concentration in the economy. The results highlight that a decline in knowledge diffusion between frontier and laggard firms could be a significant driver of empirical trends observed in the data. This study emphasizes the potential of growth theory for the analysis of factors behind declining business dynamism and the need for further investigation in this direction.

Laggard firms, technology diffusion and its structural and policy determinants

“…This points to the existence of potential barriers to technology and knowledge diffusion related to the digital transformation and the transition to a knowledge economy. The existence of increasing barriers may help explain the breakdown of the diffusion machine that is documented in this report as well as in the literature (Andrews et al, 2016, Akcigit andAtes, 2019a). This decline in the speed of knowledge diffusion may weigh on aggregate productivity growth, but could also have broader macroeconomic consequences.…”

Declining Industrial Disruption

“…Also, some of the knowledge needed to implement these systems may be blockaded from rivals by intellectual property restrictions or other means. Andrews et al (2016) suggest that the diffusion of new knowledge has slowed (see also Akcigit and Ates 2019). This interpretation is bolstered by evidence that dominant firm patent stocks have a modest negative impact on leapfrogging (Table 4).…”

Taxation and Innovation: What Do We Know?

“…3 To measure the quality of innovation, an often-used metric is the forward-citations going to a patent, which have been shown to be a proxy for economic value and instructive about the importance of the invention for subsequent innovation (Jaffe and Trajtenberg, 2002;Hall et al, 2005). The length of patent claims are also used to measure whether an innovation is incremental or radical (Akcigit and Ates, 2019a).…”

“…As highlighted in the introduction, business dynamism in the United States has been slowing in the last several decades. The key "ten facts" highlighted in the literature (Akcigit and Ates, 2019a) are that market concentration, average profits, and markups have risen; the labor share has decreased; the labor productivity gap between frontier and laggard firms has increased; entry rates have declined, as has the share of young firms; job reallocation has slowed down; the dispersion of firm growth has increased and the rise in market concentration and the fall in labor share are positively correlated.…”