What do we Know about Changing Economic Activity of Firms?

Identification of primary economic activity of ¬firms is a prerequisite for compiling several macro aggregates. This paper takes a statistical approach to understand the extent of changes in primary economic activity of ¬firms over time and across different industries. It uses the history of economic activity of over 46000 ¬firms spread over 25 years from CMIE Prowess to identify the number of times ¬firms change the nature of their business. Using the count of changes, it estimates Poisson and Negative Binomial regression models to gain predictability over changing economic activity across industry groups. The paper shows that a Poisson model accurately characterizes the distribution of count of changes across industries and that ¬firms with a long history are more likely to have changed their primary economic activity over the years. Findings show that classification can be a crucial problem in a large dataset like the MCA21 and can even lead to distortions in value addition estimates at the industry level.