Petr Sedlacek, Professor, UNSW Business School
Abstract: The process of firm entry, growth and exit – “business dynamism” – lies at the heart of modern growth models. Recent evidence suggests that business dynamism is largely driven by customer acquisition. Therefore, we develop an endogenous growth model in which firms not only innovate, but also accumulate customers in order to sell their products. In our framework, customer acquisition boosts firms’ innovation incentives and shifts market shares towards high-growth firms (“gazelles”). Combined, these effects explain over 1/3 of aggregate growth and substantially change predictions about the efficacy of growth policies. Finally, we document support for key model predictions using firm-level micro-data.