I recently attended the American Economic Association annual conference in San Diego—the world’s largest gathering for economists. There were more than 50 parallel sessions on a wide array of topics and several previews and presentations of papers –so there was a surplus of interesting ideas and insights. As an Economist who works in innovation, technology and entrepreneurship, I was particularly focused on papers that were relevant to my areas of interest. Highlights are under the cut.
Is Private Equity a Boon or a Bane?: A lot of recent debate on the role of private equity has centered on the discussion between critics arguing that it destroys jobs and supporters emphasizing it is a key engine for “creative destruction” and productivity growth. A very carefully-written paper provides the first very convincing large-scale evidence on the topic. The paper finds that deals have expanded exponentially in the past three decades so their potential impact on employment has become very important, reaching more than one million workers employed in “target companies” by the end of 2005. The paper also answers the important question of what happens to a company’s employment and productivity after being acquired by private equity. At the establishment level, employment at target companies falls rapidly by 4-6% in the first 5 years of acquisition while at the firm level, private equity transactions are a catalyst for in-firm restructuring and reallocation and have a 5-8% overall positive effect on employment.
The Effect of Change Ownership on Firm Performance: Another interesting paper asks whether productivity changes when a firm is put in the hands of more capable managers. The paper, which focuses on the Japanese cotton spinning industry at the turn of the 20th century and relies on very detailed productivity data, finds that acquired plants tend to be more productive both before and after acquisition, however plants that also go through a turnover tend to be more productive only after the turnover. Overall, this paper suggests that management matters a great deal to firm performance.
The Impact of of credit constraints on firm behavior and performance: A paper by Kalina Manova and Zhihong Yu asks if credit constraints affect how firms access and position themselves in global value chains. The interesting result of the paper is that firms with more limited access to capital, because of credit constraints, are precluded from pursuing more profitable opportunities along the value chain as these require larger investments, and end up being confined to lower value-added stages of the supply chains. This channel of distortion of credit market constraints suggests that developing countries aiming at diversifying their products and climbing up the value chain should pay attention to their financial system and constraints to access to finance.
Green Innovation: More squarely in the innovation and technology space, and specifically green innovation, an interesting paper provides direct evidence on the extent to which fiscal incentives (i.e. taxes) and technological change can contribute to fighting climate change. Relying on patent firm-level data from the auto industry, their main findings are that there is path dependency at the firm-level. A firm’s propensity to innovate in “clean technology” increases when it has innovated in clean technology in the past. Similarly, path dependency it is not just firm-specific. Firms located in countries where other companies have innovated more in clean technologies are also more likely to innovate in clean technologies.
Being Shocked into Innovativeness: There was also an interesting paper, co-authored by Paul Romer, that developed a model explaining why firms experiencing an adverse demand shock become more innovative. The paper asserts that when a firm is hit by adverse competitive shock and loses demand it is left with some “unused” factors which are “trapped” and cannot be immediately or without cost deployed elsewhere. These production factors (i.e. management) that are left idle for production can be used for innovation. Such a model is used to explain the results of the companion paper by Van Reenen, Bloom and Draca where they find that OECD firms responded to Chinese competition by stepping up their efforts to innovate.
Management as technology: Building on previous work on the importance of management was a paper that pushed the concept of management as a technology. To support this hypothesis the authors presented findings based on interviews with 8,000 firms in 20 countries across 3 continents. First, it argues that management is associated with higher productivity and profitability. Unlike other factors of production, the elasticity of output with respect to management seems broadly stable across industries and from experimental evidence it appears to be causal. Secondly, there is a reallocation of activity towards better managed firms in terms of inputs (e.g. employment) and sales growth. Finally, one of the most important factors in improving average management quality is product market competition. This operates both through selection and incentive effects. Part of the reason for this is that competition causes managers to more realistically revise the perceptions of their performance.
The conversation around these topics continues to grow as more companies in both the developing and developed world look to gain a competitive advantage through innovation, technology and entrepreneurship. I’m always interested in new ideas and insights so if you have any reading suggestions, please leave them in the comments.