Heterogeneity, productivity and selection

How do firms differ, and why do they differ even within narrowly defined industries? Using evidence from a new panel data set for four high-tech, manufacturing industries covering a 10-year period, we show how differences in sales, materials, labor costs and capital across firms can be summarized by firm-specific, dynamic factors, which we interpret in view of a structural model. The model contains the complete system of supply and factor demand equations. Our results show that a firm's efficiency is strongly linked to profitability and firm size, but only weakly related to labor productivity. Our second task is to understand the origin and evolution of the differences in efficiency. Among the firms established within the 10-year period that we consider permanent differences in efficiency dominate over differences generated by firm-specific, cumulated innovations.