Entry Barriers, Reallocation, and Productivity Growth: Evidence from Japanese manufacturing firms

This paper investigates the effect of exogenous entry barriers on productivity growth, using an R&D-based endogenous growth model. Previous theoretical and empirical literature has emphasized the role of two types of reallocation on productivity growth, namely, reallocation of market shares among incumbent firms (selection channel) and firm turnover (entry/exit channel). When firms have heterogeneous innovation efficiency levels, we find that a reduction in entry costs may reduce the selection pressure on inefficient incumbents while it stimulates the entry of new firms.

We incorporate entry cost and free entry condition into the model proposed by Lentz and Mortensen (2008) and estimate entry cost and other structural parameters using Japanese firm-level data. A counterfactual simulation of the reduced entry cost suggests that positive effect of stimulated entry on productivity growth outweighs the negative one of reduced selection. We also show quantitatively that increased R&D tax credits enhance productivity growth through both reallocation channels.