Globalisation, ICT Investment and Firm Dynamism

Abstract

There have been strong evidence showing a declining trend of firm dynamism in many other OECD countries over the last three decades. However, so far there has no compelling evidence that points to any intrinsic factor(s) that may have affected the trend of declining firm dynamism. This paper investigates some potential candidates for the intrinsic factors that might be responsible for the decline in firm dynamism. Specifically, it hypothesises that globalisation and ICT (information and communication technology) have increased the flexibility in business operation, which has contributed to the decline in firm dynamics because firms can better weather positive/negative shocks with increasing business flexibility. Using data from Canada, we find empirical support for the linkage between business flexibility and firm dynamics in Canada.

Keywords:

• Firm dynamics
• globalisation
• ICT investment
• business flexibility
• firm entry and exit

JEL code:

• L20

Notes

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes on contributors

Jianmin Tang Chief, Productivity & Trade of Economic Research and Policy Analysis Branch at Industry Canada. He conducts and disseminates economic research and policy analysis in areas under the mandate of Industry Canada, in support of the policy development. His current research interest is in productivity and foreign direct investment. He has published extensively. He received his Ph.D. in economics from Queen’s University, Canada.

Weimin Wang is a principal researcher at Statistics Canada. His research fields include economic and productivity growth, foreign direct investment and multinationals, and competition and competitiveness. He received PhD in Economics at Queen’s University.

Zhihao Yu Full Professor at Department of Economics, Carleton University. His research interests include International Trade and Firm Organization, Political Economy of government policy, and Trade and the Environment. He received his PhD in economics from the University of British Columbia, Canada, and has published extensively in the leading journals in economics.

Notes

1 Business dynamism and firm dynamics are used interchangeably in the literature. In this paper we use firm dynamics as we specifically study dynamics associated with firm entry, exit or entrepreneurship.

2 For example, see Hathaway and Litan (2014b), Haltiwanger, Jarmin, & Miranda (2013), Decker et al. (2014a, 2014b, 2016) and for the U.S.; Criscuolo and Menon (2014) and Calvino, Criscuolo, & Menon (2015) for OECD countries; Macdonald (2014) and Cao et al. (2015) for Canada.

3 See http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=8013 for a short description of LEAP dataset.

4 See http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=3701 for a short description of LFS.

5 The three-period window is (t-1, t, t + 1) with period t as the reference period. See Ciobanu and Wang (2012) for a detailed discussion on the pros and cons of this approach.

6 New self-employed workers refer to those with their current job tenure less than one or two years.

7 Appendix A provides with a description of the latent variable approach and the rationale for adopting this approach.

8 The negative covariance between Factor 1 and Factor 2 in Table 4 also indicates this relationship.

9 To our knowledge, there is no real academic concern about firm dynamics affecting business flexibility. However, we should interpret the result as association rather than causality if this is a serious concern.

10 When firm size is regressed against time trend, controlling for industry and year dummies. The coefficient for the firm size is negative but not statistically significant, indicating that firm size is stationary over time.

11 Moreover, in order to compete with foreign/global rivals, national governments are more likely to allow their domestic firms to become large multinationals (e.g. via mergers and acquisitions).

12 See Haltiwanger et al. (2013) for the U.S. and Bartelsman et al. (2005), Calvino et al. (2015) and Andrews, Criscuolo, Gal, & Menon (2015) for OECD countries.