We document the role of intangible capital in manufacturing firms' substantial contribution to non-manufacturing employment growth from 1977-2019. Exploiting data on firms' "auxiliary" establishments, we develop a novel measure of proprietary in-house knowledge and show that it is associated with increased growth and industry switching. We rationalize this reallocation in a model where firms combine physical and knowledge inputs as complements, and where producing the latter in-house confers a sector-neutral productivity advantage facilitating within-firm structural transformation. Consistent with the model, manufacturing firms with auxiliary employment pivot towards services in response to a plausibly exogenous decline in their physical input prices.

---

Xiang Ding, Teresa C. Fort, Stephen J. Redding and Peter K. Schott

1 June 2022     Paper Number CEPDP1852

Download PDF - Structural change within versus across firms: evidence from the United States

This CEP discussion paper is published under the centre's Trade programme.