The Life-cycle Growth of Plants in Colombia: Fundamentals vs. Distortions

We take advantage of rich microdata on Colombian manufacturing establishments to decompose growth over an establishment’s life cycle into that attributable to fundamental sources of idiosyncratic growth ̶ physical productivity, demand shocks (firm appeal), and input prices ̶ and distortions that weaken the link between those fundamentals and actual growth. We accomplish this using data on quantities and prices for individual products for each manufacturing establishment. Pooling all ages, measured fundamentals explain around 75% of the variability of output relative to birth level, with the remaining 25% explained by distortions and other unobserved factors. Demand shocks and TFPQ are equally important in the explained part, while input prices play a more minor role. Distortions explain more than 50% of the variance in growth up to age seven, but their contribution falls to less than 25% by around age 20. For the fraction explained by fundamentals, early life growth variation is explained by TFPQ with demand and input prices playing a minor role. But demand is the crucial factor in variation in long-run growth, with a contribution that surpases that of TFPQ and unobserved factors by around age 15. In the 2000s compared to the 1980s, two decades separated by a wave of deep structural reforms, the contribution of TFPQ to the variance in life cycle growth grows by around 6 p.p , compensated by a lesser role for input prices and, interestingly, distortions.