B04
Firm Size, Organization, and Innovation
Discussion Papers

Discussion Paper No. 163
November 8, 2021

Firm Organization with Multiple Establishments

Author:

Anna Gumpert (LMU Munich)
Henrike Steiner (Stanford GSB)
Manfred Antoni (Institut für Arbeitsmarkt- und Berufsforschung)

Abstract:

How do geographic frictions affect firm organization? We show theoretically and empirically that geographic frictions increase the use of middle managers in multi-establishment firms. In our model, we assume that a CEO's time is a resource in limited supply, shared across headquarters and establishments. Geographic frictions increase the costs of accessing the CEO. Hiring middle managers at one establishment substitutes for CEO time, which is reallocated across all establishments. Consequently, geographic frictions between the headquarters and one establishment affect the organization of all establishments of a firm. Our model is consistent with novel facts about multi-establishment firm organization that we document using administrative data from Germany. We exploit the opening of high-speed train routes to show that not only the establishments directly affected by faster travel times but also the other establishments of the firm adjust their organization. Our findings imply that local conditions propagate across space through firm organization.

Keywords:

firm organization; multi-establishment firm; knowledge hierarchy; geography;

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Discussion Paper No. 155

The Disciplinary Effect of Post-Grant Review

Author:

Markus Nagler (LMU Munich)
Stefan Sorg (MPI for Innovation and Competition)

Abstract:

We study the causal impact of invalidating marginally valid patents during post-grant opposition at the European Patent Office on affected inventors' subsequent patenting. We exploit exogenous variation in invalidation by leveraging the participation of a patent's original examiner in the opposition division as an instrument. We find a disciplinary effect of invalidation: Affected inventors file 20% fewer patent applications in the decade after the decision. This effect is entirely driven by a reduction in low-quality filings, i.e., filings that examiners associate with prior art that threatens the application's novelty or inventive step. We do not observe shifts into national patenting.

Keywords:

inventors; marginal patents; patent invalidation; patent opposition; postgrant review; epo; innovation;

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Discussion Paper No. 144

Job Creation in Tight and Slack Labor Markets

Author:

Lukas Buchheim (LMU Munich)
Martin Watzinger (LMU Munich)
Matthias Wilhelm (LMU Munich)

Abstract:

Do investment programs create more jobs in tight or in slack labor markets? We study this question using data from a large, long-term photovoltaic investment scheme in Germany. Comparing counties with high and low unemployment both over time and across space, we find that photovoltaic installations created at least twice as many jobs in slack than in tight labor markets. Our results suggest that the differences in job-creation are not driven by changes in the composition or prices of investment, capital-labor substitution, or regional migration. This leaves crowding-out as the most plausible mechanism.

Keywords:

local employment multiplier; state-dependent multiplier;

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Discussion Paper No. 137

Weak Markets, Strong Teachers: Recession at Career Start and Teacher Effectiveness

Author:

Markus Nagler (LMU Munich)
Marc Piopiunik (ifo Institute)
Martin R. West (Harvard University)

Abstract:

How do alternative job opportunities affect teacher quality? We provide causal evidence on this question by exploiting business cycle conditions at career start as a source of exogenous variation in the outside options of potential teachers. Unlike prior research, we directly assess teacher quality with value-added measures of impacts on student test scores, using administrative data on over 30,000 teachers in Florida public schools. Consistent with a Roy model of occupational choice, teachers entering the profession during recessions are significantly more effective in raising student test scores. Results are supported by robustness tests and unlikely to be driven by differential attrition.

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Discussion Paper No. 136

Disclosure and Subsequent Innovation: Evidence from the Patent Depository Library Program

Author:

Jeffrey L. Furman (Boston University Questrom School of Business)
Markus Nagler (LMU Munich)
Martin Watzinger (LMU Munich)

Abstract:

How important is information disclosure through patents for subsequent innovation? To answer this question, we examine the expansion of the USPTO Patent Library system after 1975. Before the Internet, patent libraries gave inventors access to patent documents. We find that after patent library opening, local patenting increases by 17% relative to control regions. Additional analyses suggest that the disclosure of technical information is the mechanism underlying this effect: inventors start to cite more distant prior art and the effect ceases after the introduction of the Internet. Our analyses thus provide evidence that disclosure plays an important role in cumulative innovation.

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Discussion Paper No. 55
November 4, 2021

The Life-Cycle Dynamics of Exporters and Multinational Firms

Author:

Anna Gumpert (LMU Munich)
Andreas Moxnes (University of Oslo)
Natalia Ramondo (University of California at San Diego)
Felix Tintelnot (University of Chicago)

Abstract:

This paper studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). We present a dynamic model of trade and MNE activity in which the mode of serving a market depends on the well-known proximity-concentration tradeoff. We show that the option of performing MNE activities in the model produces life-cycle patterns for exporters that differ from those in an export-only model. Calibrating our model to rich firm-level data from France and Norway, our main quantitative finding is that a reduction in trade costs triggers much larger responses in growth rates and exit rates, for young exporters, in the model with MNEs than in the model without MNEs. We also show that the model is largely consistent with a set of new facts on the joint life-cycle dynamic behavior of exporters and MNEs.

Keywords:

international trade; exporters; multinational firm; markov process; sunk cost; proximity-concentration tradeoff; trade liberalization;

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Discussion Paper No. 46
November 3, 2021

Measuring the Spillovers of Venture Capital

Author:

Monika Schnitzer (LMU München)
Martin Watzinger (LMU München)

Abstract:

We provide the first measurement of knowledge spillovers from venture capital-financed companies onto the patenting activities of other companies. On average, these spillovers are nine times larger than those generated by the R&D investment of established compa- nies. Spillover effects are larger in complex product industries than in discrete product industries. Start-ups with experienced inventors holding a patent at the time of receiv- ing the first round of investment produce the largest spillovers, indicating that venture capital fosters the commercialization of technologies. Methodologically, we contribute by developing a novel definition of the spillover pool, combining citation-based and technological proximity-based approaches.

Keywords:

venture capital; spillovers; innovation;

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Discussion Paper No. 30

The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment

Author:

Martin Watzinger (LMU Munich)
Carolin Bock (TU Darmstadt)

Abstract:

Our study analyzes the effect of the capital gains tax on the individual investment decisions of venture capitalists. By doing so, we are able to study the decisions for a sample of 76,852 funding rounds in 32 countries from 2000 to 2012. Our results support the predictions of the theoretical model that higher capital gains tax rates are associated with fewer start- ups financed and a lower probability of receiving follow-up funding. However, the results concerning the effect on the probability of success of start-ups show that a higher tax burden is associated with a higher probability of eventual start-up success.

Keywords:

venture capital; capital gains tax; selection effect; follow-up funding; innovation;

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Discussion Paper No. 29

The Organization of Knowledge in Multinational Firms

Author:

Anna Gumpert (LMU Munich)

Abstract:

This paper provides the first in-depth study of the organization of knowledge in multi- national firms. In the theory, knowledge is a costly input for firms that they can acquire at their headquarters or their production plants. Communication costs impede the ac- cess of the plants to headquarter knowledge. The model shows that multinational firms systematically acquire more knowledge at both their foreign and domestic plants than non-multinationals if their foreign plants face higher communication costs with head- quarters than their domestic plants. This theoretical prediction helps understand why multinational firms pay higher wages to workers than non-multinational firms, and why their sales decrease across space. The empirical analyses show that higher communication costs indeed decrease multinational firms’ foreign sales. Consistent with model-specific comparative statics, the decrease is stronger in sectors with less predictable production processes. Novel data on corporate transferees allow shedding light on one tool of multi- national firms’ organization of knowledge.

Keywords:

multinational firm; knowledge hierarchy; organization; geography of FDI; multinational wage premium; corporate transferees;

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Discussion Paper No. 4
November 2, 2021

How Antitrust Enforcement Can Spur Innovation

Author:

Martin Watzinger (LMU Munich)
Thomas Fackler (LMU Munich)
Markus Nagler (LMU Munich)
Monika Schnitzer (LMU Munich)

Abstract:

We study the 1956 consent decree against the Bell System to investigate whether patents held by a dominant firm are harmful for innovation and if so, whether compulsory licensing can provide an effective remedy. The consent decree settled an antitrust lawsuit that charged Bell with having foreclosed the market for telecommunications equipment. The terms of the decree allowed Bell to remain a vertically integrated monopolist in the telecommunications industry, but as a remedy, Bell had to license all its existing patents royalty-free. Thus, the path-breaking technologies developed by the Bell Laboratories became freely available to all US companies. We show that in the first five years compulsory licensing increased follow-on innovation building on Bell patents by 17%. This effect is driven mainly by young and small companies. Yet, innovation increased only outside the telecommunications equipment industry. The lack of a positive innovation effect in the telecommunications industry suggests that market foreclosure impedes innovation and that compulsory licensing without structural remedies is ineffective in ending it. The increase of follow-on innovation by small and young companies is in line with the hypothesis that patents held by a dominant firm act as a barrier to entry for start-ups. We show that the removal of this barrier increased long-run U.S. innovation, corroborating historical accounts.

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