New business formation and the productivity of manufacturing incumbents: Effects and mechanisms

Abstract

We analyze the effect of new business formation on the productivity of incumbent manufacturing establishments. We obtain robust empirical evidence that the emergence of new businesses in the same industry causes productivity improvements by intensifying competition in the output market. We also find enhanced productivity caused by increased competition from newcomers in the regional markets for inputs. We do not find any evidence for productivity enhancing effects of new business formation on upstream markets, or for more pronounced knowledge spillovers in innovative industries.