Minrui Gong 龚敏瑞

We develop a new rationale for firms to operate in multiple locations within the same country. We show that business group firms relocate operations and grow less if firms of the same group in other local labor markets offer a better labor supply, an improved fit between the requirements of the firm and the local labor force, and lower labor costs. The first two aspects are more important than costs; hence, business groups primarily address their access to human capital. Relocation is concentrated in industries with lower asset tangibility, in high-skilled jobs, and in business groups with decentralized managerial functions. Local labor conditions are of similar importance to and distinct from agglomeration economies. Business groups predominantly move jobs, but not employees, between their locations. As such, they arbitrage local labor markets.

We introduce a novel firm-level measure of failure tolerance based on firms’ patenting histories. Specifically, we quantify failure tolerance as the largest scope loss during patent examination that does not terminate a firm’s innovation sequence. Firms with greater failure tolerance tend to produce patents that are more valuable, more cited, more complex, yet also more likely to fail. At the same time, they file fewer patents and employ fewer inventors, resulting in an ambiguous relationship between failure tolerance and total innovation output. Exploiting inventor job switches, we provide causal evidence that higher failure tolerance enhances inventor productivity.