1. 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

2. 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

3. 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

4. 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; ; ; 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

5. 1. Distributed micro analysis
26 October, 2005
Stefano Scarpetta

6. 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

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

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

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

10. 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

11. 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

12. 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

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

14. 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

15. 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

16. 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

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

18. 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