Andrew Bernard, Emmanuel Dhyne, Glenn Magerman, Kalina Manova, Andreas Moxnes
The Origins of Firm Heterogeneity: A Production Network Approach
EU / Western Europe, Trade and FDI, Agriculture and food, Manufacturing, Mining, Energy, Services
This paper explores firm size heterogeneity in production networks. Using all buyer-supplier relationships in Belgium, the paper shows that firms with more customers havehigher total sales but lower sales per customer and lower market shares among thosecustomers. A decomposition of firm sales reveals that downstream factors, especiallythe number of customers, explain the large majority of firm size heterogeneity. Thesefacts motivate a model of heterogeneous firms and network formation where firms searchfor and sell to downstream buyers and buy inputs from upstream suppliers. Firms varyin their productivity and relationship capability. Higher productivity results in morematches and larger market shares among customers. Higher relationship capability re-sults in more customers and higher sales. Estimated model parameters suggest thatproductivity and relationship capability are strongly negatively correlated. A counter-factual exercise shows that the real wage gains from improving relationship capabilityare substantial, and much larger in our model compared to canonical models of one-dimensional heterogeneity.