Entrepreneurial Skills, Technological Progress, and Firm Growth*

Publication Date01 Oct 2020
AuthorAmaia Iza
DOIhttp://doi.org/10.1111/sjoe.12377
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.

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