Firm Dynamics in Developing Countries - World...
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Firm Dynamics in Developing Countries1
Ufuk Akcigit
University of Chicago & NBER
Conference on Economic Growth - July 10, 2015
1Based on a joint work with Harun Alp (UPenn) and Michael Peters (Yale)Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 1
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Background
Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.
Going from micro-to-macro is crucial.
The back-and-forth dialogue between data andtheory is important.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2
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Background
Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.
Going from micro-to-macro is crucial.
The back-and-forth dialogue between data andtheory is important.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2
![Page 4: Firm Dynamics in Developing Countries - World Bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/7/69229143707552… · Firm Dynamics in Developing Countries1 Ufuk Akcigit University](https://reader033.fdocuments.net/reader033/viewer/2022060221/5f073bbe7e708231d41bf90c/html5/thumbnails/4.jpg)
Background
Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.
Going from micro-to-macro is crucial.
The back-and-forth dialogue between data andtheory is important.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2
![Page 5: Firm Dynamics in Developing Countries - World Bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/7/69229143707552… · Firm Dynamics in Developing Countries1 Ufuk Akcigit University](https://reader033.fdocuments.net/reader033/viewer/2022060221/5f073bbe7e708231d41bf90c/html5/thumbnails/5.jpg)
What is Our Research Approach?
Start with empirical regularities in the micro data.
Motivated by those regularities, construct ageneral equilibrium theory of firm dynamics andaggregate growth.
Estimate the structural parameters of the modelusing micro-level data.
Conduct counterfactual experiments.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 3
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Motivation
Recent literature: Firm dynamics in poor countriesshow striking differences to those of rich countries
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 4
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Hsieh and Klenow (2014)
�Figure�1:��Plant�Employment�by�Age�in�the�Cross�Section�
US
Mexico
India
1/2
1
2
4
8
Empl
oym
ent (
Age
< 5=
1)
<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40
Age
Sources:�1994�1995�ASI�NSS�(India),�2003�Economic�Census�(Mexico),�and�2002�Manufacturing�Census�(U.S.).
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 5
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Hsieh and Klenow (2014)
�Figure�1:��Plant�Employment�by�Age�in�the�Cross�Section�
US
Mexico
India
1/2
1
2
4
8
Empl
oym
ent (
Age
< 5=
1)
<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40
Age
Sources:�1994�1995�ASI�NSS�(India),�2003�Economic�Census�(Mexico),�and�2002�Manufacturing�Census�(U.S.).
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 5
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The expanding firms in India
While the average life-cycle is flat, some Indianfirms manage to grow:
Age<5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 40>
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
Mean95% Confidence Interval
ASI vs NSS Family Firms
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 6
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The stagnant firms in India Extra
... but aggregate importance of tiny producersstays stubbornly high
Age0-5 6-10 11-15 16-20 21-25 26+
Sha
re o
f Est
ablis
hmen
ts
0
0.2
0.4
0.6
0.8
1
India
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Selection in the US vs India
Many small firms exist in the US as well....
... but they do not matter as much and exit quickly
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Selection in the US vs India
SHARE OF SMALL ESTABLISHMENTS (COUNT)
Age0-5 6-10 11-15 16-20 21-25 26+
Sha
re o
f Est
ablis
hmen
ts
0
0.2
0.4
0.6
0.8
1
1.2
IndiaUS
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Motivation: Entrepreneurial Selection
There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)
Subsistence entrepreneurs:No intention to growWant to keep the business within the family.
Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.
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Motivation: Entrepreneurial Selection
There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)
Subsistence entrepreneurs:No intention to growWant to keep the business within the family.
Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9
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Motivation: Entrepreneurial Selection
There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)
Subsistence entrepreneurs:No intention to growWant to keep the business within the family.
Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9
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Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10
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Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Credit constraints?
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Firm Dynamics in Developing CountriesFigure 3: Average Product and Firm Size
Note: Figure shows local linear regressions of log average product on log employment. We subtract the mean of the fitted value at log(employment)=4. Dashed lines represent 95 percent confidence bounds.
value-added/capital value-added/worker gross output/ intermediate inputs
0.3.6.9
1.21.51.8
1 2 3 4 5 6
0.51
1.52
2.53
1 2 3 4 5 6
-.2
-.1
0
.1
.2
1 2 3 4 5 6
India (2011)
0.51
1.52
2.53
1 2 3 4 5 6
-.2
-.1
0
.1
.2
1 2 3 4 5 6
Indonesia (2006)
0.3.6.9
1.21.51.8
1 2 3 4 5 6
0.51
1.52
2.53
1 2 3 4 5 6
-.2
-.1
0
.1
.2
1 2 3 4 5 6
Mexico (2008)
Log
Rat
io
Log Employment
Figure 3: Average Product and Firm Size
Note: Figure shows local linear regressions of log average product on log employment. We subtract the mean of the fitted value at log(employment)=4. Dashed lines represent 95 percent confidence bounds.
value-added/capital value-added/worker gross output/ intermediate inputs
0.3.6.9
1.21.51.8
1 2 3 4 5 6
0.51
1.52
2.53
1 2 3 4 5 6
-.2
-.1
0
.1
.2
1 2 3 4 5 6
India (2011)
0.51
1.52
2.53
1 2 3 4 5 6
-.2
-.1
0
.1
.2
1 2 3 4 5 6
Indonesia (2006)
0.3.6.9
1.21.51.8
1 2 3 4 5 6
0.51
1.52
2.53
1 2 3 4 5 6
-.2
-.1
0
.1
.2
1 2 3 4 5 6
Mexico (2008)
Log
Rat
io
Log Employment
DATA SOURCE: HSIEH AND OLKEN (2014)
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Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Credit constraints?
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10
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Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Credit constraints?
Size-dependent Policies?
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Firm Dynamics in Developing Countries
Labor market regulations at 100 employees.
020
4060
8010
0
0 50 100 150 200Employment
0 < Employment < 200
020
4060
80
0 50 100 150 200Employment
10 < Employment < 2000
1020
3040
0 50 100 150 200Employment
20 < Employment < 200
05
1015
20
50 100 150 200Employment
50 < Employment < 200
DATA SOURCE: AKCIGIT, ALP, PETERS (2014)
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Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Credit constraints?
Size-dependent Policies?
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10
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Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Credit constraints?
Size-dependent Policies?
An interesting fact: The best predictor of firm sizein India is....
vs.
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Firm Dynamics in Developing Countries
FAMILY SIZE!
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Firm Dynamics in Developing Countries
MAJOR OBSTACLE TO FIRM GROWTH:LACK OF DELEGATION
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 11
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Stylized Facts from Bloom & Van Reenen et al.’s Work
Micro-evidence: Limits to managerial delegationimportant for firm performance in developingcountries
- Outside managers misappropriate assets due to weakrule of law.
- Span of control of the owner is a binding constraint indeveloping countries.
- Family size is one of the best predictors of firm size inIndia.
Implication: Limits on managerial time reduce competitionso that unproductive firms survive (lack of selection).
SDP CC
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Stylized Facts from Bloom & Van Reenen et al.’s Work
Micro-evidence: Limits to managerial delegationimportant for firm performance in developingcountries
- Outside managers misappropriate assets due to weakrule of law.
- Span of control of the owner is a binding constraint indeveloping countries.
- Family size is one of the best predictors of firm size inIndia.
Implication: Limits on managerial time reduce competitionso that unproductive firms survive (lack of selection).
SDP CC
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12
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Stylized Facts from Bloom & Van Reenen et al.’s Work
Micro-evidence: Limits to managerial delegationimportant for firm performance in developingcountries
- Outside managers misappropriate assets due to weakrule of law.
- Span of control of the owner is a binding constraint indeveloping countries.
- Family size is one of the best predictors of firm size inIndia.
Implication: Limits on managerial time reduce competitionso that unproductive firms survive (lack of selection).
SDP CC
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12
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Stylized Facts from Bloom & Van Reenen et al.’s Work
Micro-evidence: Limits to managerial delegationimportant for firm performance in developingcountries
- Outside managers misappropriate assets due to weakrule of law.
- Span of control of the owner is a binding constraint indeveloping countries.
- Family size is one of the best predictors of firm size inIndia.
Implication: Limits on managerial time reduce competitionso that unproductive firms survive (lack of selection).
SDP CC
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12
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Stylized Facts from Bloom & Van Reenen et al.’s Work
Micro-evidence: Limits to managerial delegationimportant for firm performance in developingcountries
- Outside managers misappropriate assets due to weakrule of law.
- Span of control of the owner is a binding constraint indeveloping countries.
- Family size is one of the best predictors of firm size inIndia.
Implication: Limits on managerial time reduce competitionso that unproductive firms survive (lack of selection).
SDP CC
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12
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Lack of Delegation is a Major Problem Page 1 of 1
9/24/2014file:///C:/Users/uakcigit/Dropbox/For%20Myself/Akcigit_Peters/Slides/Yale%202014/dele...
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This paper
Research Question:How much of the observed differences across
countries can be explained by the lack to delegation?
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MODEL
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The Model Economy
0 1
quality level
q
sector j
US Economy
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The Model Economy
0 1
quality level
q
sector j
GDP = Sectors combined
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Sector-specific Productivities
0 1
quality level
q
sector j
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Example of a Firm
0 1
quality level q
sector j
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Example of another Firm
0 1
quality level q
sector j
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 20
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Productivity Growth: External R&D
0 1
quality level q
sector j
External R&D
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 21
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Productivity Growth: External R&D
0 1
quality level q
sector j
External R&D
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Reallocation is Taking Place...
0 1
quality level q
sector j
External R&D
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Competition Creates Selection
0 1
quality level q
sector j
External R&D
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Eventually Some Firms Exit
0 1
quality level q
sector j
External R&D
Exit
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 25
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In the Meantime...
0 1
quality level q
sector j
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Some New Entrants Show Up
0 1
quality level q
sector j
new entrants
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 27
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And New Entrants Replace Incumbents
0 1
quality level q
sector j
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Model Details
Production requires managerial time.
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Model Details
Production requires managerial time.The owner can run the company by herself.
But she has limited amount of time and therefore runs intospan of control problem.
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Model Details
0 # of product lines, n
V(n)
Vself(n)
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Model Details
Production requires managerial time.The owner can run the company by herself.
But she has limited amount of time and therefore runs intospan of control problem.
Or the owner can decide to hire outside managers.
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Model Details
Production requires managerial time.The owner can run the company by herself.
But she has limited amount of time and therefore runs intospan of control problem.
Or the owner can decide to hire outside managers.Managers might steal. Owner has to monitor.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29
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Model Details
Production requires managerial time.The owner can run the company by herself.
But she has limited amount of time and therefore runs intospan of control problem.
Or the owner can decide to hire outside managers.Managers might steal. Owner has to monitor.Then the net benefit is
ξc = manager′s human capital − monitoring time
ξc: Country-specific delegation benefit.
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Value Function as delegation (ξ) gets easier
0 # of product lines, n
V(n)
Vself(n)
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Value Function as delegation (ξ) gets easier
0
# of product lines, n
V(n)
n*(ξL)
Vself(n)
Vmanager(n)
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Value Function as delegation (ξ) gets easier
0
# of product lines, n
V(n)
n*(ξL)
Vself(n)
Vmanager(n)
Remark: Delegation is crucial to fight decreasing returns.
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Value Function as delegation (ξ) gets easier
0 # of product lines, n
V(n)
n*(ξL)
Vself(n)
Vmanager(n)
n*(ξH)
Remark: Delegation is crucial to fight decreasing returns.
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Implications
1 Small firms do not hire outside managers.
2 Entrepreneurs with larger time endowments(larger families) are less likely to hire managers.
3 In better contractual environments (stronger ruleof law), firms are more likely to hire managers.
4 The correlation between firm size and family sizeis weaker when the contractual environment isstronger.
5 Firm growth and size relationship is negative,more so when the rule of law gets weaker.
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Implications
1 Small firms do not hire outside managers.2 Entrepreneurs with larger time endowments
(larger families) are less likely to hire managers.
3 In better contractual environments (stronger ruleof law), firms are more likely to hire managers.
4 The correlation between firm size and family sizeis weaker when the contractual environment isstronger.
5 Firm growth and size relationship is negative,more so when the rule of law gets weaker.
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Implications
1 Small firms do not hire outside managers.2 Entrepreneurs with larger time endowments
(larger families) are less likely to hire managers.3 In better contractual environments (stronger rule
of law), firms are more likely to hire managers.
4 The correlation between firm size and family sizeis weaker when the contractual environment isstronger.
5 Firm growth and size relationship is negative,more so when the rule of law gets weaker.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31
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Implications
1 Small firms do not hire outside managers.2 Entrepreneurs with larger time endowments
(larger families) are less likely to hire managers.3 In better contractual environments (stronger rule
of law), firms are more likely to hire managers.4 The correlation between firm size and family size
is weaker when the contractual environment isstronger.
5 Firm growth and size relationship is negative,more so when the rule of law gets weaker.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31
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Implications
1 Small firms do not hire outside managers.2 Entrepreneurs with larger time endowments
(larger families) are less likely to hire managers.3 In better contractual environments (stronger rule
of law), firms are more likely to hire managers.4 The correlation between firm size and family size
is weaker when the contractual environment isstronger.
5 Firm growth and size relationship is negative,more so when the rule of law gets weaker.
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Qualitative Evidence
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Qualitative Evidence
0.1
.2.3
.4(Manager>0)
-.5 0 .5 1 1.5Employment
Prediction: Small firms are less likely to hire outside managers.
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Qualitative Evidence
-.02
-.01
0.0
1.0
2(M
anag
er>0
)
-2 -1.5 -1 -.5 0 .5 1 1.5Family Size
Prediction: Entrepreneurs with larger families are less likely to hire managers.
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Qualitative Evidence
-.005
0.005
.01
.015
.02
(Manager>0)
-.2 -.15 -.1 -.05 0 .05 .1 .15Trust
Prediction: In better contractual environments, firms are more likely to hiremanagers.
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Qualitative Evidence
-1.5
-1-.5
0.5
Empl
oym
ent
-2 -1.5 -1 -.5 0 .5 1 1.5Family Size
High-trust region Low-trust region
Prediction: The correlation between firm size and family size is weaker whenthe contractual environment is stronger.
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Qualitative Evidence
-2-1
01
2G
row
th o
f Em
ploy
men
t
0 2 4 6 8Employment
Low-trust region High-trust region
Prediction: Firm growth and size relationship is negative, more so when therule of law gets weaker.
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Role of Delegation
How important is the lack of delegationquantitatively?
How would have the Indian firms behaved if theyfaced US-level of delegation benefit?
Estimate the parameters of the model, especiallyξus and ξindia, using firm-level data from India andthe US.
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Role of Delegation
How important is the lack of delegationquantitatively?
How would have the Indian firms behaved if theyfaced US-level of delegation benefit?
Estimate the parameters of the model, especiallyξus and ξindia, using firm-level data from India andthe US.
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Role of Delegation
How important is the lack of delegationquantitatively?
How would have the Indian firms behaved if theyfaced US-level of delegation benefit?
Estimate the parameters of the model, especiallyξus and ξindia, using firm-level data from India andthe US.
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Calibration
Parameter India Value US Valueξ benefit of delegation 0.02 0.41α share of high type 0.03 0.22
Table: PARAMETER CALIBRATION FOR INDIAN FIRMS
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Implications for the life-cycleFigure: LIFE CYCLE OF US FIRMS
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5DataModel
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Implications for the life-cycleFigure: LIFE CYCLE OF INDIAN FIRMS
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5DataModel
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Selection in India (1)Figure: SHARE OF SMALL FIRMS, DATA & MODEL
Age0-5 6-10 11-15 16-20 21-25 26+
Sha
re o
f Sm
all F
irms
0.2
0.4
0.6
0.8
1
India - DataIndia - ModelUS - DataUS - Model
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Selection in India (2)
Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL)
Age0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40
Sha
re o
f Hig
h-T
ype
Firm
s
0
0.2
0.4
0.6
0.8
1India
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Selection in India (2)
Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL)
Age0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40
Sha
re o
f Hig
h-T
ype
Firm
s
0
0.2
0.4
0.6
0.8
1IndiaUS
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Selection in India (2)
Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL)
Age0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40
Sha
re o
f Hig
h-T
ype
Firm
s
0
0.2
0.4
0.6
0.8
1IndiaUSUS w/ India ,
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Isolating the Importance of Delegation
How much of this difference comes from ξUS vsξIND?
1 Give ξUS to the Indian firms,
2 Give ξIND to the US firms.
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Indian Firms with ξUS
Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξUS (MODEL)
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5IndiaUS
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 41
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Indian Firms with ξUS
Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξUS (MODEL)
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5IndiaUSIndia w/ US 9
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 41
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Indian Firms with ξUS
Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξUS (MODEL)
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5IndiaUSIndia w/ US �
Closes the gap, on average, by 50%!
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 41
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US Firms with ξIND
Figure: LIFE CYCLE IN INDIA, US AND US WITH ξIND (MODEL)
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5IndiaUS
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 42
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US Firms with ξIND
Figure: LIFE CYCLE IN INDIA, US AND US WITH ξIND (MODEL)
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5IndiaUSUS w/ India 9
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 42
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US Firms with ξIND
Figure: LIFE CYCLE IN INDIA, US AND US WITH ξIND (MODEL)
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
1.5
2
2.5
3
3.5
4
4.5
5IndiaUSUS w/ India �
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 42
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Decomposing Delegation Benefits ξ
Try to decompose delegation benefit ξ into:
rule of lawhuman capitalfinancial development
Accounting exercise usingξc = β0 + β1 × ROLc + β2 ×HCc + β3 × FinDevc + φ× ln(y) + εc
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43
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Decomposing Delegation Benefits ξ
Try to decompose delegation benefit ξ into:rule of law
human capitalfinancial development
Accounting exercise usingξc = β0 + β1 × ROLc + β2 ×HCc + β3 × FinDevc + φ× ln(y) + εc
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43
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Decomposing Delegation Benefits ξ
Try to decompose delegation benefit ξ into:rule of lawhuman capital
financial development
Accounting exercise usingξc = β0 + β1 × ROLc + β2 ×HCc + β3 × FinDevc + φ× ln(y) + εc
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43
![Page 88: Firm Dynamics in Developing Countries - World Bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/7/69229143707552… · Firm Dynamics in Developing Countries1 Ufuk Akcigit University](https://reader033.fdocuments.net/reader033/viewer/2022060221/5f073bbe7e708231d41bf90c/html5/thumbnails/88.jpg)
Decomposing Delegation Benefits ξ
Try to decompose delegation benefit ξ into:rule of lawhuman capitalfinancial development
Accounting exercise usingξc = β0 + β1 × ROLc + β2 ×HCc + β3 × FinDevc + φ× ln(y) + εc
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43
![Page 89: Firm Dynamics in Developing Countries - World Bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/7/69229143707552… · Firm Dynamics in Developing Countries1 Ufuk Akcigit University](https://reader033.fdocuments.net/reader033/viewer/2022060221/5f073bbe7e708231d41bf90c/html5/thumbnails/89.jpg)
Decomposing Delegation Benefits ξ
Try to decompose delegation benefit ξ into:rule of lawhuman capitalfinancial development
Accounting exercise usingξc = β0 + β1 × ROLc + β2 ×HCc + β3 × FinDevc + φ× ln(y) + εc
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43
![Page 90: Firm Dynamics in Developing Countries - World Bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/7/69229143707552… · Firm Dynamics in Developing Countries1 Ufuk Akcigit University](https://reader033.fdocuments.net/reader033/viewer/2022060221/5f073bbe7e708231d41bf90c/html5/thumbnails/90.jpg)
Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
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Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROL
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
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Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HC
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
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Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HCUS w/ India ROL + HC + PC
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
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Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HCUS w/ India ROL + HC + PC
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
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Conclusions
Firm selection and factor reallocation are key foreconomic growth yet they don’t happen indeveloping countries.Not everybody is destined to be a goodentrepreneur. (Right allocation of microcredits?)Credit constraints and size-dependent distortionsare (I am sure) important. Yet there is somethingelse that is fundamentally missing in developingcountries.Tranformative entrepreneurs need a goodplayground with strong rule of law and trust.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 45