Eric Gonnard, Lukas Kleine-Rueschkamp, Paolo Veneri THE GEOGRAPHY OF FIRM DYNAMICS - MEASURING Business Demography for Regional Development Eric Gonnard, Lukas Kleine-Rueschkamp, Paolo Veneri

Change in active firms Net business population growth (%) 2013-2014* United States Europe Heterogeneity in the distribution of business activity within countries Lack of a comparable data source at the subnational level for the OECD Large spatial heterogeneity but: Unclear whether changes are caused by firm entries or exits. What type of regions experience more firm entries/exits? What type of firms (according to sector or size class) establish in which regions? What consequences result for regional employment? Australia South Korea * Or last available year

Objectives of the Project Assessment of the main methods in measuring subnational business demography Development of a new database for OECD regions Analysis of key issues and trends in business dynamics at the regional level Application to examine regional factors affecting business and employment creation

Outcome and Key Findings Novel regional database on: Business births, deaths, survival Employment creation or destruction by firm birth or death New businesses constitute, on average, 10% of all firms but regional variation is substantial (~9% for employer firms) (12 countries) Concentrated in urban and most productive regions (frontier) Associated with better local governance, more developed R&D infrastructure, lower financing constraints, and more educated local labour force Exact information on location of employment is vital for understanding the impact of business dynamics on employment Using enterprise-level data can be susceptible to a bias from a region’s actual share of national employment Headquarter bias: pronounced in capital-city regions New businesses and SMEs contribute significantly to regional employment growth Business births can create up to 8% new employment

Novel database A cross-country BD database already exists at the national level Entrepreneurship Indicators Programme (2006) and OECD-Eurostat Manual for Business Demography Statistics (2007) Regional data: Eurostat regional database (14 OECD countries) We combine data from Eurostat (14 countries) with data from National Statistical Offices (13 countries) This project is developing two databases Enterprise-based indicators Establishment-based indicators The international comparability of indicators will make it possible to better understand the dynamics of economic activities in each place and to learn how to design and implement effective policy to support businesses, also through the exchange of experiences and good practices among policy makers.

Data description Main indicators: Active firm population / active employment Birth/death/survival rates of firms Employment creation/loss rates resulting from plant births/deaths Geographic dimension: TL2 or TL3 Time dimension: 2007 to 2014 (on average) Breakdowns by sector of economic activity and by size class

Business births, TL2 (2014) Capital regions drive business creation Large variation in firm birth rates across OECD regions Number of new firms is considerable: on average 10.2% Note: figures include non-employer firms Regions with high birth rates tend to also have high death rates – greater business dynamics generally Dispersion in birth rates (births/actives) by country, 2014 or last available year

Business births, TL2 (2014) Firms births slightly lower for employer firms at 9.4% - Though, the regional dimension (dispersion) is comparable Arguments for using all firms: Much better coverage the regional dimension is left relatively unaffected by the exclusion of non-employer firms. The within-country range of dispersion is in most cases similar between the two indicators, and the same region is often the respective country’s minimum/maximum with respect to both measures. The potential biases that may derive from this choice are at least partially mitigated by the use of birth and death rates. Professor Michael Fritsch (leading academic): statistics should include solo self-employed persons

Deaths and births, TL3 Highly urbanized regions are more dynamic (higher churn) Mention: urban-rural divide causes by non-employer firms Birth and death rates as well as shares of births, deaths and active firms by degree of urbanization, all firms Urban regions more dynamic (larger birth and death rates) and accounting for disproportionate share of firm deaths and especially births

Breakdown by sector Urban-rural difference reflects sectoral composition of regional economies overall differences between rural, urban and intermediate areas may reflect in part the composition of business births in terms of sector and size class of the firm. Indeed, the sectoral composition in business births differs substantially between urban regions and other areas. For example, more than 60% of new business births in the financial sector as well as in information and communication activities take place in predominantly urban regions (Figure 5). This evidence most likely reflects the necessity of these firms to tap into a particular workforce, as well as the need to access networks and services. Birth shares by sector (TL3, 2014, or last available)

Sectors, Size and Survival of new firms Survival odds lower for employer firms across regions Growth in non-tradable share is a characteristic of lagging regions Frontier regions recorded a shift from non-tradable sectors to tradable sectors The share of new large employers is larger in urban frontier regions Relative to their share among active firms, urban frontier regions report disproportionately large enterprise births of firms with more than 10 employees Survival odds lower for employer firms across regions Across regions, 53% of non-employer but only 49% of employer firms survive the first three years (8 countries) Frontier regions: (large positive respectively negative population growth)

The headquarter bias: differences in national employment shares (2014, TL2) Illustration with capital-city regions Enterprise-level data causes a 7 percentage point upward bias in employment statistics of capital regions (~1.4 p.p. on average) Start: Emphasise relevance of firm births because of the consequences for regional employment. - As mentioned beforehand, there are some methodological challenges in assessing employment created by new firms. - 1.4 percentage point difference on average - Rising to 7 percent for capital-city regions (Helsinki and Ile de France: above 12%) - But: enterprise data better coverage and more harmonised

Variation in employment growth rates, TL2 Largest growth in mostly metropolitan as well as frontier and catching-up regions Annual employment growth rates TL2 regions, 2010-14 Heterogeneity across regions in the post-crisis period Sectors: B to N (best coverage and comparability); European countries: mostly negative growth rates - Acknowledge that this does not reveal anything about the drivers of employment changes: intensive or extensive margin – move to employment in new firms More than 1.2 percentage points difference in annual employment growth rate between mostly metropolitan (>0.8%) and non-metropolitan (<-0.4%) regions Clear discrepancy in employment growth between catching-up and frontier regions on the one hand and diverging and keeping-up regions on the other

Employment creation by new firms, TL3 Significant within-country differences in created employment Large regional variation in employment creation rates, ranging from 8% to 0.2% Even within countries, differences are considerable Employment creation rates by new employer enterprises (2014)

Regional characteristics Determinants of business demography Regional drivers of firms’ dynamics: What institutional/social factors are driving business creation/death/survival ? Institutions Credit constraints / funds Human capital and R&D (innovation) Slides on credit constraints and human capital dropped: Mention briefly their role Human capital: education of labour force, R&D expenditure, workers in knowledge-intense services

Local governance and firm birth rates Gallup World Poll Indicators (average 2008-2015) Average birth rates between 2008 and 2015. 165 TL2 Regions of 15 countries. Quality of local governance is positively correlated with firm creations

Conclusions Large heterogeneity in business demography across regions Discrepancies between urban and rural regions Differences along the lines of regional productivity (At least partially) explicable by regional characteristics: Local governance, credit constraints, education and innovation Monitoring regional employment creation by new firms requires precise geographic information Headquarter bias can lead to deviations from actual employment creation Best available data show that the contribution of new enterprises is large and very heterogeneous across regions Future work: Using large scale firm level data set (i.e. ORBIS) to estimate the role of local characteristics associated with the success of SMEs

Thank you!

Appendix EU Funds and Quality of Governance Lower corruption enhances effectiveness of funds; significant effect on net business population growth (BACK)

Appendix Business population changes: tradable vs non-tradable Growth in non-tradable share is a characteristic of lagging regions Net business population growth (2007-2013) by region classification (BACK)

Appendix Regional productivity and size of new firms Relative weight of business births by degree of productivity (share of business births as a proportion of the share of active firms) The share of new large employers is larger in urban frontier regions (BACK)