Firm dynamics, productivity and job creation: Some evidence OECD Conference on “Understanding Entrepreneurship: Issues and Numbers” Firm dynamics, productivity and job creation: Some evidence Stefano Scarpetta Lead Economist The World Bank Paris 26 – 27 October 2005

Plan of the presentation Distributed micro analysis to assess firm dynamics and its role for productivity and job creation The magnitude and characteristics of firm demographics Firm size at entry; Firm survival Post entry growth Resource reallocation, firm demographics and productivity Static efficiency Dynamic efficiency Concluding remarks: can we use firm-level data to assess entrepreneurship and the policy challenges 26 October, 2005 Stefano Scarpetta

1. Distributed micro analysis The challenge of cross-country analysis: Sectoral data e.g. OECD-STAN; Unido aggregate sectors obscure causal mechanism Meta-analysis of results from micro studies A challenge to control for data, method, and context Little within-country variation in policy (e.g. before and after) Cross-country longitudinal micro dataset Generally not possible (disclosure) EUROSTAT attempting to build EU panel, but from existing databases, DG MARTK 26 October, 2005 Stefano Scarpetta

1. Distributed micro analysis OECD sample Demographics (entry/exit) for 10 countries Productivity decompositions for 7 countries Survival analysis 7 countries World Bank sample Same variables, 14 Central and Eastern Europe, Latin America and South East Asia Data are disaggregated by: industry (2-3 digit); size classes 1-9; 10-19; 20-49; 50-99; 100-249; 250-499; 500+ (for OECD sample the groups between 1 and 20 and the groups between 100 and 500 are combined) Time (late 1980s – late 1990s) 26 October, 2005 Stefano Scarpetta

1. Distributed micro analysis 26 October, 2005 Stefano Scarpetta

1. Distributed micro analysis Unit of measurement: Firm, following (Eurostat, 1998) “an organizational unit producing goods or services which benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources”. Data extracted following same protocols by experts in each countries, Mika Maliranta, Satu Nurmi, Jonathan Haskel, Richard Duhaitois, Pedro Portugal, Thorsten Schank, Fabiano Schivardi, Ralf Marten, Ylva Heden, Ellen Hogenboom, Mihail Hazans, Jaan Masso, John Earle, Milan Vodopivec, Maurice Kugler, Mark Roberts, Andrea Repetto, Gabriel Sanchez, David Kaplan... 26 October, 2005 Stefano Scarpetta

2. The magnitude and characteristics of firm demographics 26 October, 2005 Stefano Scarpetta

2. The magnitude and characteristics of firm demographics Entry and exit rates tend to be similar across countries 26 October, 2005 Stefano Scarpetta

2. The magnitude and characteristics of firm demographics …but entering firms are small 26 October, 2005 Stefano Scarpetta

2. The magnitude and characteristics of firm demographics Post-entry employment growth varies more across countries Average firm size growth relative to entry, by age 26 October, 2005 Stefano Scarpetta

3. Assessing the role of firm dynamics on productivity The cross-sectional efficiency of resource allocation The dynamic efficiency: the role of entry and exit The heterogeneity of firms and the effects on productivity 26 October, 2005 Stefano Scarpetta

The cross-sectional efficiency of the allocation of activity Olley and Pakes (1996) note that in the cross section, the level of productivity for a sector at a point in time can be decomposed as follows: where: N: # of firms in a sector; D is the operator for the cross sectoral deviation from sectoral average The first term is the unweighted average of firm-level productivity, the second term reflects the cross-sectional efficiency of the allocation of resources. The cross term captures allocative efficiency since it reflects the extent to which firms with greater efficiency have a greater market share. 26 October, 2005 Stefano Scarpetta

The cross-sectional efficiency of the allocation of activity 26 October, 2005 Stefano Scarpetta

The dynamic efficiency Foster, Haltiwanger and Krizan (FHK , 2001) : in this decomposition, each term is weighted by the average (over 3/5 years) market shares as follows: The within-firm effect is within-firm productivity growth weighted by initial output shares. The between-firm effect captures the gains in aggregate productivity coming from the expanding market of high productivity firms, or from low-productivity firms’ shrinking shares weighted by initial shares. The ‘cross effect’ reflects gains in productivity from high-productivity growth firms’ expanding shares or from low-productivity growth firms’ shrinking shares. The entry effect is the sum of the differences between each entering firm’s productivity and initial productivity in the industry, weighted by its market share. The exit effect is the sum of the differences between each exiting firm’s productivity and initial productivity in the industry, weighted by its market share. 26 October, 2005 Stefano Scarpetta

The dynamic efficiency: the role of entry and exit The contribution of entry and exit of firms to total labor productivity growth 26 October, 2005 Stefano Scarpetta

The dynamic efficiency: the role of entry and exit Stronger contribution of entry to productivity growth in medium high tech industries 26 October, 2005 Stefano Scarpetta

The dynamic efficiency: which firms increase employment? The heterogeneity of firms: labor productivity and growth 26 October, 2005 Stefano Scarpetta

Concluding remarks Sizeable process of creative destruction in ALL countries Differences in the nature of the process of creative destruction; Market experimentation Strong contribution of resource reallocation on productivity from both static and dynamic perspectives Differences in the role of creative destruction on productivity growth across countries and technology groups Differences in degree of firm heterogeneity across countries More barriers to growth than barriers to entry Factors that may promote experimentation: More market-based financial system Lower administrative costs of start up Lower costs of adjusting the workforce to accommodate changes in demand 26 October, 2005 Stefano Scarpetta