Firm size populations modeled through competition-colonization dynamics
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Firm size populations modeled through competition-colonization dynamics J. M. Applegate1
· Adam Lampert2
Accepted: 8 September 2020 © The Author(s) 2020
Abstract The Firm Ecosystem Model is a dynamical model based on the empirical finding that firm characteristics, such as the tendency to innovate and competitive advantages, vary according to firm size. Firm dynamics leading to various population distributions are considered as a competition-colonization scenario in a spatially defined market, where firms of differing sizes are treated as separate species with different competition and colonization characteristics. Smaller firms, given adequate investment funds to innovate, are able to colonize available space more quickly than larger firms, and larger firms are assumed to have stronger competition characteristics and are able to outcompete smaller firms for occupied space. With startup and mortality parameters determined empirically, firm populations reach equilibria dependent on the values of the capital investment parameters. The model predictions provide a good qualitative fit to empirical data from the Business Dynamics Statistics database. Finally, we explore how alternative mortality or investment conditions affect the firm size distributions. Keywords Firm dynamics · Firm size distributions · Competition · Ecological dynamics JEL Classification C63 · D21 · J21 · L11
J. M. Applegate
[email protected] Adam Lampert [email protected] 1
Complex Systems Research Group, Arizona State University, 1031 S. Palm Walk, Tempe, AZ 85281-2701, USA
2
School of Human Evolution and Social Change, Simon A. Levin Mathematical, Computational and Modeling Science Center, Arizona State University, 900 S. Cady Mall, Tempe, AZ 85281-2402, USA
J.M. Applegate, A. Lampert
1 Introduction Firms are the medium through which individuals participate in the productive aspect of an economy, and in aggregate compose the domain of business that is one of the three pillars of macroeconomic theory. Despite the central role in a myriad of economic questions, an individual firm is classically modeled as a black box that essentially serves as a vehicle for a production function. This formulation is unsatisfying to anyone interested in understanding the macroeconomic implications of firm dynamics where heterogeneity in firm characteristics is important, firms interact with each other and dynamics are endogenous. Firm dynamics determine the relative proportions of different size firm populations, and these proportions are linked to macroeconomic questions, such as what types of firms provide the most employment (Birch 1981; Haltiwanger et al. 2013), which types innovate (Acs and Audretsch 1987; Hathaway and Litan 2014) and whether a large variety of firm types promotes social well-being (Hannan and Freeman 1993). Understanding the drivers of firm dynamics is therefore of importance not only to academics but also to management professionals and policy makers. Early models exploring firm dynamics focused on empirical firm size distributions an
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