The distribution of firm investment reflects the degree to which larger firms drive aggregate output. These studies have expanded into the area of investment. Recently, large firm-level data sets using administrative sources have made construction of full distributions possible. The data also capture firm-level characteristics, such as ownership and turnover. This makes it possible to identify the characteristics of firms at various levels and to analyze their contributions to aggregate investment. Here are some details about the different distributions.
Globally, there are many cases in which large firms dominate the economy. The fact that small firms make up the majority of US companies suggests that they invest more than larger firms. However, this doesn’t imply that smaller firms do not participate in investment. The output distribution of firms varies by industry, but smaller firms tend to invest more than larger firms. The distribution of firm size, therefore, serves as a proxy for the investment opportunity set.
A distribution of firm size is consistent with firm investment patterns worldwide. The same sizing pattern has been seen in natural and biological phenomena such as network theory and wealth distributions. Yet, firm size is not as clear-cut in the investment distribution. Consequently, it is difficult to directly compare the two. It would be better if the investment distributions were more similar. This way, researchers can make a more accurate comparison. But before they make their findings public, we should make sure that we understand the factors that influence the distribution of firm size.
Among the factors that impact firm size, uncertainty is one of the most important ones. Depending on the size of the firm, the impact of a sudden change in the economic cycle may vary by size. In addition to the risk associated with uncertainty, studies have shown that larger firms experience more intense fluctuations in investment, sales, and revenue than smaller ones. Hence, it is not surprising that they were hit harder by the COVID-19 pandemic.
The output distribution of firms globally is highly concentrated. Moreover, these distributions are consistent with natural and biological phenomena. They also show similar shaped distributions. But in terms of firm size, these distributions are not very clear. In the case of aggregate investment, small firms tend to be more capital-intensive and more likely to invest in research and development. These two factors are associated with the growth of a firm. Hence, these studies have shown that the size of the largest firm is a major driver of aggregate investment.
In the case of the United States, large firms are more likely to invest than small firms. Moreover, small firms are more likely to be young and to be present in industries with higher investment levels. The latter type of firm is generally more capital-intensive, and it has the potential to generate more innovative and creative products. So, the size of a firm acts as a proxy for the investment opportunities of that firm. In a given country, the largest firms account for about 50% of total investments.
