Stylised facts on firm entry-exit and age, and their relatioships with size-growth dynamics IE/LEM, Scuola Superiore Sant Anna IDPE 2015-2016
Where are we? References
Outline References Entry, exit, survival Entry/Exit and size-growth Role of age
ENTRY / EXIT
How do we measure entry/exit? In principle easy: new firms appear, while others die and leave the market Empirically not that straightforward: 1 Changes of names 2 Mergers & Acquisitions: external vs. internal ( organic ) growth 3 Changes of principal sector of activity (product diversification) 4 Degree of coverage in the samples at hand: surveys vs. official business registers or specific data collection procedures (e.g., thresholds on size or missing values) Whether we can truly follow firm demography depends on the available data!
How do we measure entry/exit? In principle easy: new firms appear, while others die and leave the market Empirically not that straightforward: 1 Changes of names 2 Mergers & Acquisitions: external vs. internal ( organic ) growth 3 Changes of principal sector of activity (product diversification) 4 Degree of coverage in the samples at hand: surveys vs. official business registers or specific data collection procedures (e.g., thresholds on size or missing values) Whether we can truly follow firm demography depends on the available data!
The evidence References Many papers in the 1990s and 2000s investigating empirical regularities. Here two largely cited works: Dunne et al. (1988) [DRS]: US census data covering 1963-82, waves of 5 years Bartelsman et al. (2005) [BSS]: OECD cross-country data See also Geroski (1995) and Caves (1998) for reviews
DRS: Entry dynamics References Entry rates (# of entry in t / # of incumbents in t) is about 40-50%, stable over time Entrants tend to be small, both in terms of average size and of collective market shares
DRS: Exit dynamics References Exit rates similar to entry rates Exiters tend to be small
DRS: Exit dynamics References High failure rates: averaging, 61.5% die 5 years after entry and 79.6% after 10 years
DRS: Survival References Average size of survivors (relative to all firms) increases as the cohort becomes older Two effects: smaller entrants exit and survivors becomes bigger over time
DRS: Survival References Market share of entrants (penetration rate) decreases as the cohort becomes older Despite average size increases, the impact vanishes: survivors grow fast initially, but then slow down
DRS: Entry and Exit by industries Within each industry, entry rate exit rate There is cross-industry variation, however.
DRS: Industry dynamics References Overall picture from DRS on the role of entry/exit on industry evolution: Entry is mostly due to small firms, and occurs in relatively stable proportions as compared to incumbents Most of entrants dies out relatively soon, while survivors grow fast at the beginning and then their share in the market stabilizes Exiters are replaced by a similarly numerous new cohort of small entrants, and this creates high correlation between entry and exit rates within industries Net entry is much smaller than gross entry Bartelsman et al. (2005): is such US based evidence confirmed in other countries?
DRS: Industry dynamics References Overall picture from DRS on the role of entry/exit on industry evolution: Entry is mostly due to small firms, and occurs in relatively stable proportions as compared to incumbents Most of entrants dies out relatively soon, while survivors grow fast at the beginning and then their share in the market stabilizes Exiters are replaced by a similarly numerous new cohort of small entrants, and this creates high correlation between entry and exit rates within industries Net entry is much smaller than gross entry Bartelsman et al. (2005): is such US based evidence confirmed in other countries?
DRS: Industry dynamics References Overall picture from DRS on the role of entry/exit on industry evolution: Entry is mostly due to small firms, and occurs in relatively stable proportions as compared to incumbents Most of entrants dies out relatively soon, while survivors grow fast at the beginning and then their share in the market stabilizes Exiters are replaced by a similarly numerous new cohort of small entrants, and this creates high correlation between entry and exit rates within industries Net entry is much smaller than gross entry Bartelsman et al. (2005): is such US based evidence confirmed in other countries?
BSS: Entry/Exit References Turnover rates (Entry+Exit) are around 15-25% in all countries Lower rates than in DRS, but still there is a certain turbulence New fact: turnover rates tend to be higher in services
BSS: Entry/Exit by industries Entry and exit positively correlated, altough country-specific variation
BSS: Survival References Survival probability (of a cohort): increases with time-from-entry Probability to exit (hazard) increases in the 2 nd year, than flattens: 20-40% entrants fail in the 1 st or 2 nd year 40-50% of entrants survive after the first 7 years
BSS: Survival References Similar patterns between US and Europe (here Italy)
BSS: Entry/Exit and size (jobs) Employment turnover (creation + destruction of jobs) due to entry/exit is 5-10% Easy explanation : most of entry and exit is accounted for by small firms. Indeed BSS find that size of entrants is about 40-50% the size of the incumbents
BSS: Post-entry growth relative to entry size US: remarkable growth, about 65% after 7 years Europe: much lower figures, 5-35% More contestable markets and more innovative entrants in the US?
Other evidences on entry (Geroski, 1995) Small entry rates (2-15%) estimated in the UK De novo entry is more frequent, but less successful than entry by diversification Entry rates varies according to the product-industry life cycle: higher in the infancy and initial stages Barriers to entry are high in most industries Entry does not react much to profits
Other evidences on entry (Geroski, 1995) Small entry rates (2-15%) estimated in the UK De novo entry is more frequent, but less successful than entry by diversification Entry rates varies according to the product-industry life cycle: higher in the infancy and initial stages Barriers to entry are high in most industries Entry does not react much to profits
Other evidences on entry (Geroski, 1995) Small entry rates (2-15%) estimated in the UK De novo entry is more frequent, but less successful than entry by diversification Entry rates varies according to the product-industry life cycle: higher in the infancy and initial stages Barriers to entry are high in most industries Entry does not react much to profits
Other evidences on entry (Geroski, 1995) Small entry rates (2-15%) estimated in the UK De novo entry is more frequent, but less successful than entry by diversification Entry rates varies according to the product-industry life cycle: higher in the infancy and initial stages Barriers to entry are high in most industries Entry does not react much to profits
Other evidences on entry (Geroski, 1995) Small entry rates (2-15%) estimated in the UK De novo entry is more frequent, but less successful than entry by diversification Entry rates varies according to the product-industry life cycle: higher in the infancy and initial stages Barriers to entry are high in most industries Entry does not react much to profits
Entry/Exit and size-growth dynamics What have we learnt? Small firms grow more, but also more likely to exit: selectivity bias in Gibrat s regressions Also aging must be taken into account: especially young small firms seem to be experiencing fast growth
Entry/Exit and size-growth dynamics What have we learnt? Small firms grow more, but also more likely to exit: selectivity bias in Gibrat s regressions Also aging must be taken into account: especially young small firms seem to be experiencing fast growth
The Role of Age
Firm age References Measurement: Typically one would like to have foundation year, but this is rarely available in the datasets Obviously interrelated with the problem of correctly identifying entry/exit Haltiwanger et al. (2013): Age and size-growth dynamics (in terms of employment, job creation and destruction) on US Census data, with precise identification of plants and firm births
Firm age References Measurement: Typically one would like to have foundation year, but this is rarely available in the datasets Obviously interrelated with the problem of correctly identifying entry/exit Haltiwanger et al. (2013): Age and size-growth dynamics (in terms of employment, job creation and destruction) on US Census data, with precise identification of plants and firm births
HJM: small vs. large and young vs. mature Nearly all births are small Young firms are mostly small, but there are some small mature firms Most of employment is due to mature firms, within both small and large firms CAVEAT: definition of small firms here is 500+ employees! In EUROSTAT SMEs are < 250...
HJM: who creates jobs? References Of course, births only contribute to Job Creation (JC), for about 15% Within small firms: JC is similar across young vs. mature, about 20% each Large mature firms account for about 38% of JC JC is more a matter of age than of size: older firms create more jobs, whatever their size
HJM: who destroys jobs? Within small firms: Job Destruction is similar across young vs. mature, about 30% each Large mature firms account for about 35-40% of JD JD stems from a combination of size and age: small destroy more than large, but older firms destroy more whatever their size (downsizing old firms)
HJM: size and net (employment) growth DEF: g = L t L t 1/0.5(L t + Lt 1) at establishment level DEF: total g computed by different size classes, as weighted sums of establishment level figures
Not controlling for age: inverse relationship Growth rate for size class 1-4: 15.2% Growth rate for size class 5-9: 3.3% Controlling for age: both positive and negative for small firms, flatter for medium-large firms Lots of small firms that destroy job via exit? References HJM: size and net (employment) growth
Not controlling for age: inverse relationship Growth rate for size class 1-4: 15.2% Growth rate for size class 5-9: 3.3% Controlling for age: both positive and negative for small firms, flatter for medium-large firms Lots of small firms that destroy job via exit? References HJM: size and net (employment) growth
HJM: size and exit References Small firms are more likely to exit, even after controlling for age
HJM: age and growth References Weak association between age and growth, even after controlling for size
HJM: age and growth, continuing firms BUT, conditional on survival, young grow more than more mature, even controlling for size
HJM: age and exit References Young firms die more frequently, even controlling for size Critical role of start-ups: most die, but survivors grow fast (high-growth firms are usually young, beyond small)
Implications for us industrial economists 1 High correlation and simultaneity between entry and exit disconfirms textbook perfect-competition profit-driven model, that indeed predicts negative correlation Entry in sectors with above normal profits Exit in sectors with below normal profits Entry/Exit works more as a selection mechanism, rather than as automatic adjustment to equilibrium 2 Continuous process, over time, of competitive selection and reallocation of market shares 3 Most of these involves the fringe of small new firms, while survivors and incumbents tend to be larger
Implications for us industrial economists 1 High correlation and simultaneity between entry and exit disconfirms textbook perfect-competition profit-driven model, that indeed predicts negative correlation Entry in sectors with above normal profits Exit in sectors with below normal profits Entry/Exit works more as a selection mechanism, rather than as automatic adjustment to equilibrium 2 Continuous process, over time, of competitive selection and reallocation of market shares 3 Most of these involves the fringe of small new firms, while survivors and incumbents tend to be larger
Implications for us industrial economists 1 High correlation and simultaneity between entry and exit disconfirms textbook perfect-competition profit-driven model, that indeed predicts negative correlation Entry in sectors with above normal profits Exit in sectors with below normal profits Entry/Exit works more as a selection mechanism, rather than as automatic adjustment to equilibrium 2 Continuous process, over time, of competitive selection and reallocation of market shares 3 Most of these involves the fringe of small new firms, while survivors and incumbents tend to be larger
Implications for us industrial economists 1 High correlation and simultaneity between entry and exit disconfirms textbook perfect-competition profit-driven model, that indeed predicts negative correlation Entry in sectors with above normal profits Exit in sectors with below normal profits Entry/Exit works more as a selection mechanism, rather than as automatic adjustment to equilibrium 2 Continuous process, over time, of competitive selection and reallocation of market shares 3 Most of these involves the fringe of small new firms, while survivors and incumbents tend to be larger
Pills of Policy implications: two issues 1 Small is beautiful? Well, in the past there was certain emphasis on flexibility, ability to exploit niches, and ability to create markets and jobs. Nowadays, SMEs are increasingly recognised as weak (lacking managerial ability, resources to invest in innovation and internationalization) And yes, they contribute to net job creation, but we saw that this is more a matter of being young than being small. 2 Consensus about supporting entry and creation of new businesses, but 2 contrasting views: Erga omnes subsidies (large scale public financing): seeds in the field, and then some firms will appear and survive, while other die Selective policies to avoid waste of public money implicit in erga omnes schemes, e.g. targeting specific business plans/new ideas that are valid, but suffer from market failures (in particular, lacking finance, but also organizational and entrepreneurial skills)
Pills of Policy implications: two issues 1 Small is beautiful? Well, in the past there was certain emphasis on flexibility, ability to exploit niches, and ability to create markets and jobs. Nowadays, SMEs are increasingly recognised as weak (lacking managerial ability, resources to invest in innovation and internationalization) And yes, they contribute to net job creation, but we saw that this is more a matter of being young than being small. 2 Consensus about supporting entry and creation of new businesses, but 2 contrasting views: Erga omnes subsidies (large scale public financing): seeds in the field, and then some firms will appear and survive, while other die Selective policies to avoid waste of public money implicit in erga omnes schemes, e.g. targeting specific business plans/new ideas that are valid, but suffer from market failures (in particular, lacking finance, but also organizational and entrepreneurial skills)
Pills of Policy implications: two issues 1 Small is beautiful? Well, in the past there was certain emphasis on flexibility, ability to exploit niches, and ability to create markets and jobs. Nowadays, SMEs are increasingly recognised as weak (lacking managerial ability, resources to invest in innovation and internationalization) And yes, they contribute to net job creation, but we saw that this is more a matter of being young than being small. 2 Consensus about supporting entry and creation of new businesses, but 2 contrasting views: Erga omnes subsidies (large scale public financing): seeds in the field, and then some firms will appear and survive, while other die Selective policies to avoid waste of public money implicit in erga omnes schemes, e.g. targeting specific business plans/new ideas that are valid, but suffer from market failures (in particular, lacking finance, but also organizational and entrepreneurial skills)
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