Industry learning environments and the heterogeneity of firm performance

This paper characterizes inter-industry heterogeneity in rates of learning-by-doing and examines how the industry learning rate affects firm performance. Using data from Compustat and the US Census Bureau on over 55,000 manufacturing plants from 1973 to 2000, we measure the learning rate as the coefficient on prior cumulative output in a production function. We find that the rate of "industry learning-intensity" displays considerable variation across industries and that after controlling for industry-wide technology improvements, it is positively correlated with the industry capital-labor ratio and the industry R&D and advertising intensity. More importantly, we find evidence that the industry learning-intensity affects the heterogeneity of firm performance. In particular, higher rates of learning are associated with wider dispersion in firm q and firm profitability. Depending on the estimation method adopted to compute learning coefficients, a standard deviation increase in the industry learning intensity increases the interpercentile range (10th to 90th) of firm profitability by 16 to 25 percent over the mean, which is comparable to the increase resulting from a standard deviation increase in industry R&D or advertising intensity. These findings imply that learning-intensity expands the range of industry profitability, and thus it represents an important characteristic of the industry environment.