| Abstract |
Resource reallocation within firms drives economic growth in a manner similar to interfirm
reallocations from unproductive to productive sectors. Such within-firm reallocation
is exemplified by struggling firms that develop new core businesses and achieve significant
growth, as often highlighted in real-world business cases. Using panel data on Japanese firms,
we document these within-firm reallocations by identifying top-selling product switches to new
products. We provide evidence that firms undergoing a major business switch exhibit sales
and productivity growth. These firms also show distinctive customer acquisition behavior
before and after the switch. Since the customer base that fits a firm’s existing business
may not appreciate its new business, the switching firm rationally delays the switch until a
sufficient number of new potential customers is acquired. We present a model of frictional
markets where sellers and buyers are matched and explain the patterns of customer acquisition
and search efforts we found in the data.
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