The Decline in the Firm Start Up Rate and the Geographic Expansion of Large Firms

Abstract

The last 35 years has witnessed a large decrease in the firm start up rate. At the same time, the largest firms increased the share of establishments they own and the number of markets in which they operate. One goal of this paper is to assess the extent to which these two trends are related. I establish this using geographic and industry variation. In particular, a one percentage point increase in the share of firms in a state with more than 250 employees nationally is correlated with 1.25 percentage point decline in the start up rate. I then build a model of firm dynamics in which firms can choose the number of markets in which they open establishments. In the model, an exogenous shock to ICT and management technology can explain both trends documented above. Firms use the technology to expand into additional markets and the increase in firm scale lowers the aggregate start up rate.