Business Dynamics in Europe 17th Round Table on Business Survey Frames, Rome, October 30th Business Dynamics in Europe NICOLA BRANDT Economic Analysis and Statistics Division Organisation for Economic Co-operation and Development

This presentation Describes the findings from some recent OECD work on firm entry and survival using new cross-country data from Eurostat. Discusses some of the methodological difficulties associated with international business demographics data. Draws conclusions and provides an outlook on OECD work linking firm dynamics to economic performance Data comprises firm entry and exit, growth and survival with a detailed breakdown of ICT-related industries. Presentation presents results for nine EU countries from 1998-2000. Data set contains already two more. First results published in Statistics in Focus, March 2003. Illustrate methodological difficulties by comparing Eurostat data with data from an earlier firm level data project conducted by OECD economics department, covers late 1980s – mid- or late– 1990s, European countries and US, Japan and Canada.

Cross-country differences are highest among ICT-related industries … Results of entry rate regressions New firms are often thought to be important for employment growth. Schumpeterian models of economic growth ascribe to them an important role for innovation and technology adoption. Regressions compare firm entry rates across countries, controlling for countries’ industry composition with industry fixed effects Denmark, the reference country, seems to have the largest entry rates, but by and large entry rates do not seem to differ a lot across countries. Right-hand side panel accounts for cross-country differences in entry rates within ICT related industries. Eurostat data provides fine sectoral breakdown especially for computer services. Country fixed effects are relatively small in absolute size and differ little across countries. Country-specific ICT-industry fixed effects are much larger in absolute size and differ a lot more across countries. With the exception of Spain, they are all significantly negative: Entry rates in ICT industries are particularly large in Denmark. Once country specific ICT effects are accounted for, country fixed effects become even smaller in absolute values, for some countries significantly positive: Denmark’s apparent lead is mainly due to high entry rates in ICT-related industries. Indicates significance at the ***1 %, ** 5 %, * 10 % level Denmark is the reference

…which are particularly dynamic Fixed effects for selected industries Graph shows industry fixed effects for some selected industries. Food & beverages industry is the reference. Chemical industry typical for manufacturing industries: Industry fixed effects are generally small and in many cases not significant in manufacturing industries. Exception: Manufacturing of office machinery and computer industry. In services: Industry fixed effects are larger and in most cases significant. ICT-related services industries and some business services, such as labour recruitment and advertising consistently stand out as having particularly large entry rates. This fits into theories of product life cycles, which find that entry rates are particularly high in young industries, levelling off as markets become more mature. Industry fixed effects are much larger and differ a lot more amongst each other than country fixed effects. Seems to suggest that industry specific factors, such as technology and the maturity of an industry, are much more important as determinants of firm entry than country specific factors, including policies and institutions. However, as apparent from the last slide, country-specific ICT-effects are large and differ considerably across countries. This may indicate that there may be more of a scope for policy in young sectors, some of which are thought to have been especially important for technological change in recent years. Indicates significance at the ***1 %, ** 5 %, * 10 % level Manufacturing of food & beverages is the reference

New firms are small - but results differ between Eurostat and OECD data... Average size of entering firms Frequently reported finding in the business demographics literature: New firms enter the market at a very small size. (Interpreted as a symptom of market entrant’s uncertainty about market conditions and their own potential profitability: firms enter small to learn about these aspects first, exit if unprofitable, expand if successful) Interesting differences between Eurostat and OECD data. Average entrant firm size considerably larger according to the OECD data. Different sample periods: OECD data different subperiods over late 1980s- mid to end- 1990s. But: differences quite large in some cases. Probably not due to sample periods alone.

...because firms without employees play an important role for both entry and exit Entry and exit: proportion of firms with less than five employees Important difference between the Eurostat and the OECD data consists in size thresholds. The OECD firm level data project excluded single person firms, except for the Netherlands. Eurostat imposes no such size threshold. The vast majority of firm entry is due to firms with less than five employees. In most countries, the lion’s share is due to firms without employees. Eurostat has checked that firms included in the data are active. Problem of false unemployment remains.

…and the concept of firm entry seems to differ Entry: proportion of firms with more than 20 employees OECD data suggests a much larger proportion of large entering firms Eurostat made a special effort to clean entry and exit data for M&A, changes in legal form or ownership and other demographic events. This has not been done within the OECD firm level data project. M&A and other demographic events more likely to involve larger firms.

Results of hazard rate regressions Hazard rates: probability to exit the market after a certain life span conditional on having survived, so far. Regression with one- and two-year hazard rates, 1999-2000; results have to be treated with caution due to the short investigated time period. Nevertheless interesting to look at infant firm mortality. Hazard rates differ more across countries than birth rates, as country fixed are larger and differ more amongst each other. Output gap variable is significant, indicating that chances of survival are higher during booms. Estimated size class effects indicate that life is more hazardous for smaller firms, although hazard rates do not decline monotonically by size class. Most industry effects are insignificant and so are country specific ICT-effects. Indicates significance at the ***1 %, ** 5 %, * 10 % level Denmark is the reference country 1-4 employees is the reference size class

Conclusions on entry/exit work Thresholds and the ability to identify genuine firm entry and exit can affect results. Hazard rates differ considerably across countries, while differences in entry rates are sizeable only among ICT-related industries. This indicates that policy may be important mainly for firm survival and for entry in young and dynamic sectors. To judge whether high firm entry or survival are desirable or not, the link with economic performance has to be studied. There is ongoing OECD work on this. Data differences have been shown to affect the measured average entrant firm size. It remains an open question how large the impact would be on results linking policies and institutions to firm dynamics and the latter to economic performance. Preliminary results of ongoing OECD work on the link between firm entry and economic performance: Not surprisingly given the low cross-country variation of entry and exit rates, it is difficult to establish a link between firm entry and economic performance of countries. However some interesting industry patterns arise, as industry firm entry is correlated with output and employment growth, especially strongly across services industries. This could simply be due to the presence of technological and business opportunities to different extents in different industries inducing firm entry as well as expansion of entrant and incumbent firms. However, new firms might also influence output and employment growth via their impact on productivity due to their own innovative activity and the competitive pressure that this creates. Productivity growth regressions suggest that firm entry is positively related to subsequent productivity growth in services industries. In manufacturing, the impact of formal R&D seems to be more important.