The Dynamics of Development: Innovation and Reallocation

This paper proposes a quantitative model of firm dynamics with endogenous innovation to study growth acceleration episodes triggered by reforms. The authors find that reforms removing barriers to firm entry lead to persistent growth in total-factor productivity (TFP) and declining average firm size,...

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Bibliographic Details
Published in:Policy File 2018
Main Authors: Buera, Francisco J, Fattal Jaef, Roberto N
Format: Report
Language:English
Subjects:
Developing countries
Economic policy
Government
LDCs
The World Bank
Online Access:Request full text
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Summary:This paper proposes a quantitative model of firm dynamics with endogenous innovation to study growth acceleration episodes triggered by reforms. The authors find that reforms removing barriers to firm entry lead to persistent growth in total-factor productivity (TFP) and declining average firm size, as in the experience of successful post-communist transitions. Reforms that reverse resource misallocation result in more protracted paths of TFP and rising average firm size, as in the experience of non-communist growth accelerations. When calibrating the reforms to data from Chile's and China's growth accelerations, the model can replicate the macro and firm-level features of these episodes.