Declining business dynamism has been observed across many advanced economies, however its consequences have been less well studied. In this paper, we propose that declining business dynamism has led to a decrease in the financial constraints faced by firms. We use well established methods to identify financial constraints and then develop a new approach to measure the fraction of financially constrained firms. We find that the fraction has fallen over time and this is driven by rising firm age. Had business dynamism not declined, firms would be younger and more financially constrained.

The literature has found that interaction effects exist between capital and labour in the adjustment cost function of firms, but there is no consensus on whether these costs are positive or negative. Using a dynamic firm structural model where capital is broken up into buildings and machinery & equipment, this paper finds that part of this ambiguity can be directly tied to capital heterogeneity. Firms are found to enjoy negative costs between labour and machinery & equipment, and between labour and buildings, while they suffer from positive costs between buildings and machinery & equipment. When compared to a model with only capital and labour, the interaction cost is found to be positive, highlighting how neglecting capital heterogeneity can lead to a spurious result on its sign. I evaluate the importance of these interactions by simulating three shocks: an increase in uncertainty, an increase in the interest rate, and an increase in the wage rate. I uncover large differences in the steady state dynamics of each input that are directly attributable to the interaction effects in the adjustment cost function.

The literature shows that zombie firms can lower aggregate productivity, impede reallocation and constrain the growth of healthy firms. In Canada and other advanced economies, the share of zombie firms has been rising over the past few decades, with recent studies showing that the share in Canada could potentially be the highest in the world. However, these studies of the Canadian context are based only on publicly traded Canadian firms. This paper presents new evidence on zombification using Canadian-controlled private corporations and publicly traded firms. The paper finds that the zombie share among all firms is considerably lower and diverging in trend. However, a number of notable results show that zombies are increasingly showing up in the mining, quarrying, and oil and gas extraction sector; they are accounting for more resources over time; their performance and productivity are worsening; they are negatively impacting the productivity and growth of healthy firms; and they are increasingly lowering aggregate productivity by a sizable margin.

Medium-term growth prospects of Caribbean countries have weakened in recent years. We examine these trends by providing new estimates of potential GDP growth for the region. Our findings reveal a broad-based decline over time, driven by declining contributions from human capital and total factor productivity. Linking these factors to firm-level data, we identify significant scope for aggregate productivity gains through the efficient reallocation of resources between firms and the removal of firm-level structural obstacles. Addressing issues such as the cost and access to finance, workforce education, tax administration, and business licensing and permits are associated with higher aggregate welfare.

Did the COVID-19 pandemic zombify the economy? Commentators have pointed to the pandemic and related business support measures potentially fueling zombification. Using administrative data covering the universe of Canadian firms, we find a broad-based decline in the share of zombie firms across industries relative to pre-pandemic levels. Whereas business support measures kept firms alive and operating as non-zombie firms, the decline in the zombie firm share was caused by would-be zombie firms exiting, indicative of the pandemic’s cleansing effects. As a consequence, while aggregate labour productivity worsened in Canada over the pandemic, it was not driven by zombie firms.

The zombie firm literature has typically used datasets that under-represent small firms or include only listed firms. In this paper, we present new evidence on the zombie firm phenomenon using a confidential dataset that covers the entire population of Canadian firms. We find the majority of zombie firms have between 1-5 employees and that private zombie firms differ substantially from their listed counterparts. Nevertheless, zombification is worsening, where: zombie firms are increasingly in the commodity sector; are hoarding more resources; are declining in their performance and productivity; are hurting the productivity and growth of healthy firms; and are increasingly lowering aggregate productivity.

The unifying theme of this thesis is to understand the dynamics of firms in terms of their investments and productivity. In the first chapter, I explore how adjustment costs influence the investment dynamics of firms. This chapter is motivated by two unsettled issues in the literature: there is a discrepancy on the estimated sign of the interaction term between total capital and labour in the adjustment cost function, and that capital aggregation may severely bias the parameter estimates. I explicitly account for both issues by developing a firm structural model with labour and two types of heterogenous capital, and estimate the adjustment cost parameters. The main finding is that there are distinct complementarity/substitutability effects between the inputs in the adjustment cost function that are independent of the production function, and these effects lead to asymmetric outcomes when a fiscal policy subsidy is targeted towards each capital good. In the second chapter, we explore the productivity dynamics of firms. This chapter is motivated by the fact that simple Markov processes are widely used to model productivity in the literature, yet not much is known about how this process varies across firms, or over time, especially for the top 1% of productive firms. We leverage a comprehensive dataset that allows us to robustly estimate productivity across its distribution, even for the top 1%. Using new non-parametric methods, our main finding is that productivity deviates substantially from the ubiquitous AR(1), where it has fat tails, a heterogenous shock process and strong persistence. In the third chapter, we study the influence of financial constraints on investment dynamics. This chapter is motivated by two simultaneous trends that have been recorded in the literature: declining business dynamism and declining investment sensitivities. The chapter proposes that these two trends are linked, where declining business dynamism has led to an increase in the average age of firms, leading to a decrease in financial constraints, proxied by investment sensitivities. We measure the investment sensitivity for private domestic firms in both manufacturing and services and find that it is significant, suggesting that these firms are financially constrained as a group. Using a financial constraint index, our main finding is that these constraints have declined over time, of which we show that changes in age are the dominant driving factor.