The Slow Growth of New Plants: Learning about Demand

It is well known that new businesses are typically much smaller than their established industry competitors, and that this size gap closes slowly. We show that even in commodity-like product markets, these patterns do not reflect productivity gaps, but rather differences in demand-side fundamentals. We document and explore patterns in plants’ idiosyncratic demand levels by estimating a dynamic model of plant expansion in the presence of a demand accumulation process (e.g., building a customer base). We find active accumulation driven by plants’ past production decisions quantitatively dominates passive demand accumulation, and that withinfirm spillovers affect demand levels but not growth. This demand accumulation process has important implications for ongoing research in fields as diverse as industrial organization, macro, finance, and trade.

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