How and why do firms differ?

Tor Klette and Arvid Raknerud ()
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Arvid Raknerud: Statistics Norway, Postal: P.O.B 8131 Dep, N-0033 Oslo , Norway

No 30/2002, Memorandum from Oslo University, Department of Economics

Abstract: How do firms differ, and why do they di.er even within narrowly defined industries? Using evidence from six high-tech, manufacturing industries covering a 24-year period, we show that di.erences in sales, materials, labor costs and capital across firms can largely be summarized by a single, firm-specific, dynamic factor, which we label effciency in the light of our structural model. The model contains the complete system of supply and factor demand equations. It suggests that e.ciency is strongly linked to profitability and firm size, but it is unrelated to labor productivity. Our second task is to understand the origin and evolution of the differences in effciency. Among the firms established within the 24 year period that we consider, permanent differences in efficiency dominate over di.erences generated by firm-specific, cumulated innovations.

Keywords: effciency; firm heterogeneity; labor productivity; intrinsic differences; firmspecific innovations; state space models; maximum likelihood (search for similar items in EconPapers)
JEL-codes: C33 C51 D21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2003-06-18
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