Economies before Scale: Learning, Survival and Performance of Young Plants in the Age of Cloud Computing

Sponsored by Stanford Technology Ventures Program, Stanford Institute for Economic Policy Research


Tuesday, October 9, 2018
4:00 pm – 5:30 pm
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3rd Floor Conference Room, John A. and Cynthia Fry Gunn Building, 366 Galvez Street

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Event Details:

Join Kristina McElheran from the University of Toronto for a seminar on survival and scaling in the age of cloud computing. Young firms are central to productivity and job growth, yet they fail at high rates. This dynamic can be understood as an outcome of high uncertainty early in life combined with costly learning about the productivity of irreversible investments. Recent advances in how firms access information technology (IT) - in particular, cloud computing – have dramatically lowered the costs of learning about productivity-enhancing IT. Using detailed Census Bureau data from 2006 to 2014, we explore whether this technological change has altered young-firm dynamics in the U.S. manufacturing sector. We find that young plants enjoy a roughly 5% lower annual failure rate on average due to IT services expenditure, while traditional IT capital investment increases the chance of failure. Conditional on survival, young plants exhibit much higher productivity from recent advances in IT services than do older plants. Detailed mechanism tests support technology-driven shocks to learning: older plants benefit from new IT services only if they are in high-uncertainty industries, and new establishments of existing firms benefit only if they operate outside their parent firm’s primary industry. Young, small plants benefit the most, though we find no evidence for a financial-frictions mechanism. This study provides the first large-scale evidence concerning the magnitude and mechanisms of how recent advances in IT are changing how young firms survive and thrive before they achieve significant experience and scale of their own.   

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