Entrepreneurial Skills, Technological Progress, and Firm Growth*

• Published date: 01 October 2020
• Author: Amaia Iza
• DOI: http://doi.org/10.1111/sjoe.12377
• Date: 01 October 2020

Scand. J. of Economics 122(4), 1374–1402, 2020

DOI: 10.1111/sjoe.12377

Entrepreneurial Skills, Technological

Progress, and Firm Growth*

Amaia Iza

University of the Basque Country (UPV/EHU), 48015 Bilbao, Spain

amaia.iza@ehu.eus

Abstract

Using cross-country establishment-level data, I show that employmentprofiles over a firm’s life

cycle are flatter in fast-growing economies than in slow-growing economies. The difference in

average employment over the firm’s life cycle increases with plant age. I propose a frictionless

overlapping-generations model with exogenous technological progress. Firm productivity also

depends on entrepreneurs’ skills. Entrepreneurs can increase their skills over their life cycle,

but the growth of the vintage component of younger cohorts’ skills is higher in fast-growing

economies than in slow-growingeconomies. This model is able to explain most of the differences

observed in the sample between fast-growing and slow-growing economies.

Keywords: Productivity; obsolescence; occupational choice; overlapping generations

JEL classification:E23; J24; L26; O30

I. Introduction

Over the last few years, there has been a growing interest in analyzing the

relationship between firm dynamics and the level of development across

countries; see, among others, Hsieh and Klenow (2009, 2014) and Garc´ıa-

Santana and Ramos (2015). In one of the most relevant papers, Hsieh

and Klenow (2014) analyze life-cycle employment growth for plants in the

United States, Mexico, and India. They find that firms in Mexico and India

have lower life-cycle employment growth than those in the United States.

Alam (2017) concludes that this finding can be extended to more countries.

However, there are only a handful of papers relating firm dynamics to

aggregate economic growth rate. One exception is Caunedo and Yurdagul

(2018), who find a negative relationship between average firm age and

aggregate economic growth.

*This paper has benefited from useful comments by Cruz ´

Angel Echevarr´ıa, participants at

the Second Workshop in Macroeconomics at the University of the Basque Country, and two

anonymous referees. Financial support from Ministerio de Econom´ıa y Competitividad/Fondo

Europeo de Desarrollo Regional EU (ECO2015-64467-R MINECO/FEDER, EU) is gratefully

acknowledged.

C

The editors of The Scandinavian Journal of Economics 2019.

A. Iza 1375

In this paper, I show that, for a broad set of countries, the employment

profile over a firm’s life cycle is flatter (steeper) for fast-growing (slow-

growing) economies than for slow-growing (fast-growing) economies.

Across fast-growing economies, plants that are 15–20, 21–24, and 31–34

years old are, respectively, twice, slightly higher than twice, and slightly

higher than 2.5 times, on average, as large as plants under the age

of 5. However, across slow-growing economies, plants that are 15–20,

21–24, and 31–34 years old are, respectively, almost 2.5 times, almost

three times, and more than four times, on average, larger than plants

under the age of 5. I propose the hypothesis that that old firms become

more rapidly obsolete in fast-growing economies than in slow-growing

economies. A rapid economic growth rate makes the expertise of incumbent

entrepreneurs rapidly obsolete. Firms can update their technology, but

they have to do so at a faster rate in fast-growing economies than in

slow-growing economies. To quantify the importance of this mechanism,

I consider a frictionless model where firm productivity is determined

by entrepreneurs’ skills. In particular, I analyze an occupational choice

overlapping-generations economy in the spirit of Lucas (1978). In this

model, there is technological progress that increases the technology frontier

of the economy, although technological progress implies producing with

a higher degree of complexity in a similar way to Poschke (2018) or

Michaels (2007). Exogenous technological progress will not be adopted

in the same way by all firms.1An update in technology requires that

entrepreneurs are able to produce with a higher degree of complexity.

Regarding entrepreneurs’ skills, as in Guner et al. (2017), an entrepreneur’s

ability at birth depends upon two components: (i) a vintage component,

which depends on the state of the art of the technology when the

entrepreneur enters and is constant over their life cycle; (ii) an innate

ability that can grow over the entrepreneur’s life cycle. I show that

employment growth over a firm’s life cycle depends on both entrepreneurs’

skills over their life cycle and on the growth rate of the vintage

component of younger entrepreneurs’ skills. Fast technological progress

will make the vintage component of the skills young cohorts grow

at a high rate. Firms become more rapidly obsolete in fast-growing

economies than in slow-growing economies. I calibrate the model to

the US economy. Changing the exogenous technological progress of

the benchmark model, it is possible to explain, mostly, the observed

1Comin and Hobijn (2010) find that the lags in adopting new technologies can be very large.

They also build a model characterized by exogenous growth in the “world technology frontier”

but their interest is in analyzing how countries differin the adoption of new capital (technology)

vintages.

C

The editors of The Scandinavian Journal of Economics 2019.