[Paper Review] The role of industry, occupation, and location specific knowledge in the survival of new firms

Cristian Jara-Figueroa, Bogang Jun+2 more|arXiv (Cornell University)|Jul 23, 2018

Firm Innovation and Growth3 citations

TL;DR

This paper investigates how industry, occupation, and location-specific knowledge carried by early hires influences the survival and growth of pioneer firms—new firms entering an industry not previously present in a region. Using comprehensive work history data from Brazil, it finds that industry-specific knowledge and local labor market experience significantly boost pioneer firm survival, while occupation-specific knowledge does not, highlighting the critical role of industry-related human capital in regional economic diversification.

ABSTRACT

How do regions acquire the knowledge they need to diversify their economic activities? How does the migration of workers among firms and industries contribute to the diffusion of that knowledge? Here we measure the industry, occupation, and location-specific knowledge carried by workers from one establishment to the next using a dataset summarizing the individual work history for an entire country. We study pioneer firms--firms operating in an industry that was not present in a region--because the success of pioneers is the basic unit of regional economic diversification. We find that the growth and survival of pioneers increase significantly when their first hires are workers with experience in a related industry, and with work experience in the same location, but not with past experience in a related occupation. We compare these results with new firms that are not pioneers and find that industry-specific knowledge is significantly more important for pioneer than non-pioneer firms. To address endogeneity we use Bartik instruments, which leverage national fluctuations in the demand for an activity as shocks for local labor supply. The instrumental variable estimates support the finding that industry-related knowledge is a predictor of the survival and growth of pioneer firms. These findings expand our understanding of the micro-mechanisms underlying regional economic diversification events.

Motivation & Objective

• To understand the micro-level mechanisms behind regional economic diversification by analyzing the role of worker-specific knowledge in new firm survival.
• To disentangle the relative importance of industry-specific, occupation-specific, and location-specific knowledge in the success of pioneer firms versus non-pioneer firms.
• To assess whether the survival of pioneer firms—key drivers of industrial diversification—is influenced by the relatedness of workers' prior experience to the new firm's industry and location.
• To address endogeneity concerns in hiring and firm formation using Bartik instrumental variables based on national industrial demand shifts.
• To evaluate whether the knowledge brought by early hires, particularly from related industries and local labor markets, contributes to firm survival beyond formal education or general human capital.

Proposed method

• Utilizes a comprehensive administrative dataset of individual work histories from Brazil, covering nearly all workers in the country, to measure industry, occupation, and location-specific knowledge.
• Classifies workers based on the relatedness of their prior industry and occupation to the new firm’s industry and job role, using a two-dimensional measure of knowledge relatedness.
• Defines 'pioneer firms' as those operating in an industry not previously present in a region, distinguishing them from non-pioneer new firms.
• Employs a fixed-effects regression model to estimate the impact of related industry and location knowledge on firm survival and growth, controlling for formal education and firm-level characteristics.
• Uses Bartik-style instrumental variables to address endogeneity, leveraging national fluctuations in demand for industries as exogenous shocks to local labor supply of related workers.
• Performs robustness checks by excluding the most experienced employee and testing the role of social capital through location-specific knowledge as a proxy for embeddedness.

Experimental results

Research questions

• RQ1 How does the industry-specific knowledge of a firm’s first hires affect the survival and growth of pioneer firms?
• RQ2 To what extent does location-specific knowledge—experience in the same geographic area—predict the success of pioneer firms?
• RQ3 How does occupation-specific knowledge compare in importance to industry-specific knowledge in determining the survival of pioneer firms?
• RQ4 Is the importance of industry-specific knowledge greater for pioneer firms than for non-pioneer new firms?
• RQ5 To what extent can the observed relationships be attributed to endogenous hiring or social capital, rather than causal knowledge transfer?

Key findings

• The survival of pioneer firms increases significantly when their first hires have prior experience in a related industry, indicating that industry-specific knowledge is a critical driver of firm success.
• Firms with first hires who have prior work experience in the same location show significantly higher survival rates, suggesting that location-specific knowledge contributes to firm resilience.
• Occupation-specific knowledge does not significantly predict the survival or growth of pioneer firms, indicating that occupational relatedness is less relevant than industry-related experience in new industrial contexts.
• Industry-specific knowledge is significantly more important for pioneer firms than for non-pioneer firms, highlighting its central role in regional industrial diversification.
• Instrumental variable estimates using Bartik shocks confirm that the positive effect of related industry knowledge on pioneer firm survival is robust to endogeneity concerns.
• The effect of related industry knowledge is not driven solely by the most experienced employee; the broader team’s related experience also contributes significantly to firm survival.