Economies Before Scale: Survival and Performance of Young Plants in the Age of Cloud Computing

Young firms are central to productivity and job growth in the United States, yet they fail at high rates. We examine how a recent rise in firms’ ability to access information technology as a service affected the survival and performance of young establishments in the U.S. manufacturing sector. Using detailed Census Bureau data, we track a large representative sample of plants from 2006 to 2014. We find that the ability to “rent” IT as needed – in particular, via cloud computing – was associated with significantly higher survival and growth among young plants. This contrasts with investments in traditional IT capital, which increased their likelihood of failure. Conditional on survival, young plants also exhibited much higher productivity than older plants from IT services expenditure. The effect was more important in IT-intensive and high-variance industries, consistent with a greater option value from reductions in the cost of experimenting with new IT. Also consistent with a learning-based mechanism, the effects are related more to age than to size, and apply to new establishments of existing firms. Our study provides the first empirical evidence that this emerging technology is changing how firms learn about their IT requirements and benefit from shared economies of scale before they achieve significant experience and scale of their own.