This dissertation describes a broad set of topics in firm dynamics and macroeconomics, including young firm dynamics, business dynamism, firm innovation, technological advance, and economic growth in the U.S. economy. In Chapter 1, I study how workers’ uncertain job prospects affect young firms’ pay and employment growth, and quantify macroeconomic implications. Building a heterogeneous-firm directed search model in which workers gradually learn about permanent firm productivity types, I find that the learning process creates endogenous wage differentials for young firms. In the model, a high performing young firm must pay a higher wage than that of high performing old firms, while a low performing young firm offers a lower wage than that of low performing old firms, to attract workers. This is because workers are unsure whether the young firm’s performance reflects its fundamental type or a temporary shock given the lack of track records. I find that these wage differentials affect both hiring and retention margins of young firms and can dampen the growth of high-potential young firms. Furthermore, the model indicates that higher uncertainty about young firms results in bigger wage differentials and thus hampers overall young firm activity and aggregate productivity. Using employee-employer linked data from the U.S. Census Bureau and regression specifications guided by the model, I provide empirical support for the novel predictions of the model.

Chapter 2 studies the effect of competition on firm innovation by developing a discrete-time endogenous growth model where multi-product firms do two types of innovation subject to friction in technology spillovers. Firms improve their existing products through internal innovation while entering others’ product markets through external innovation. We introduce a novel friction, which we label as imperfect technology spillovers, which refer to frictions in learning others’ technology in the process of external innovation. In contrast to existing models, this friction allows incumbent firms to defend themselves from competitors by building technological barriers through internal innovation. Using firm-level data from the U.S. Census Bureau integrated with firm-level patent data, we find regression results consistent with the model predictions. Our counterfactual analysis shows that rising competition by foreign firms leads domestic incumbent firms to undertake (i) more (less) internal innovation for the products in which they have (do not have) a technological advantage, and (ii) less external innovation. This compositional change in firm innovation affects overall innovation in the aggregate economy in different directions depending on the costs of external innovation. Specifically, the shift in innovation composition in response to rising competition decreases overall innovation in the U.S., but would increase overall innovation in an economy with high external innovation costs.

Lastly, Chapter 3 examines how increasing knowledge complexity and the accompanying rise in innovation cost affect firm innovation patterns and business dynamism in the U.S. economy. Using detailed firm-level data from S&P’s Compustat and the U.S. Census Bureau, integrated with the U.S. patent database (USPTO PatentViews), we document the increasing trend in knowledge complexity in firm innovation activities. Specifically, the inventor team size, the number of technology types (technology subclasses), and the degree of interdependence across different technology subclasses associated with firms’ patent portfolio have been increasing over time. Furthermore, we find the increasing trend of knowledge complexity is associated with the declining trend of business dynamism, such as firm entry, the share of young firms, and young firms’ activity in job creation and reallocation. We offer a simple endogenous growth model in which different R&D inputs are interdependent (complementary) to each other and firms are required to use different types of inputs to generate a given amount of innovation. This increases more complexity in firm innovation process and makes small, young firms with less knowledge base more difficult to conduct innovation as before. This can impede firm entry and dampen the growth of small and young firms.