Working Paper: CEPR ID: DP6948
Authors: Volker Nocke; Stephen R. Yeaple
Abstract: We develop a theory of multiproduct firms to analyze the effects of globalization on the distributions of firm size, scope, and productivity. In the model, firms are heterogeneous in how well they cope with expanding their product range. The model generates a negative relationship between firm size and market-to-book ratio, thus explaining the "size-discount puzzle" found in the data. Globalization induces a merger wave that leads to an improvement in average productivity. This improvement is not due to selection effects but rather due to product-level productivity effects. The model predicts that globalization leads to a flattening of the size distribution of firms.
Keywords: firm heterogeneity; firm size distribution; merger wave; multiproduct firms; productivity; size discount; trade liberalization
JEL Codes: F12; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| globalization (F60) | merger wave (G34) |
| merger wave (G34) | reallocation of product divisions from large high-cost firms to small low-cost firms (L23) |
| reallocation of product divisions from large high-cost firms to small low-cost firms (L23) | productivity at industry level (L69) |
| reallocation of product divisions from large high-cost firms to small low-cost firms (L23) | productivity at firm level (D21) |
| reallocation of product divisions from large high-cost firms to small low-cost firms (L23) | productivity at product level (D20) |
| globalization (F60) | flattening of size distribution of firms (L25) |
| larger firms experience a more significant decline in domestic sales compared to smaller firms (L25) | flattening of size distribution of firms (L25) |
| firm size (L25) | market-to-book ratios (G32) |