Table of Contents s342

DSTI/EAS/IND/SWP/AH(2001)3

Table of contents

WORK WITH FIRM-LEVEL STATISTICS: some key applications 3

1. Introduction 3

2. Firm demographics: exit, entry and turnover of firms 4

3. Entrepreneurship and the growth of firms 6

4. The size dimension: the role of SMEs in the economy 7

4.1 The contribution of SMEs to overall performance 7

4.2 Work on high-growth firms 9

5. Women entrepreneurship 10

6. The dynamics of productivity growth 13

6.1 The contribution of firm-level dynamics to aggregate productivity growth 13

6.2 The role of upsizing and downsizing 16

7. Understanding the growth of firms 17

7.1 Technology, innovation and the role of ICT 17

7.2 Other factors 22

8. Wrapping up: the importance of firm-level statistics 24

selected studies 26

General surveys of firm-level studies 26

Entry and exit, job flows 26

Entrepreneurship and SMEs 27

Women entrepreneurship 27

Productivity 28

Analytical studies 29

WORK WITH FIRM-LEVEL STATISTICS: some key applications

1. Introduction

. Work with firm-level statistics covers many areas and summarising this work is no simple matter, although some surveys are available (OECD, 1998; Bartelsman and Doms, 2000; OECD, 2001a; Ahn, 2001). This paper provides a brief overview of the main areas of work, primarily covering those that will be discussed at the OECD workshop on firm-level statistics. No attempt is made to be exhaustive, however, and the survey primarily covers work that is based on work with official firm-level statistics in OECD member countries, as opposed to that based on sample surveys.[1]

. The studies surveyed here rely on several firm-level sources, ranging from business register data to longitudinally linked results of production surveys. They all have in common, however, that they are based on information on the economic characteristics of individual firms or establishments. The survey distinguishes between six areas of work, that are discussed in turn:

- Firm demographics: These studies focus on the processes of exit, entry, turnover and survival, i.e. the creation and destruction of firms. Such work is available from statistical offices in several OECD countries.

- Entrepreneurship and the growth of firms: This work builds on the first area and looks in more detail at the growth and survival of firms, i.e. which types of firms grow, which entrepreneurs are most likely to survive and what the characteristics of growing and declining firms are. Some of this work also examines age and vintage effects.

- The size dimension: A considerable amount of work focuses on this aspect, i.e. the role of small and medium-sized enterprises (SMEs), their growth over time, the role of high-technology SMEs and start-ups, and so on.

- Women entrepreneurship: These studies focus on the gender dimension of entrepreneurship, i.e. the role of women entrepreneurs in overall entrepreneurial activity and the specific characteristics of women entrepreneurship.

- The dynamics of productivity growth: This area of work focuses on the firm-level dimensions of productivity growth, notably the respective contributions of existing firms, exit and entry, and changes in market shares to overall productivity growth. Some work has also examined the link between productivity and employment growth at the firm level, i.e. the role of upsizing and downsizing firms.

- Understanding the drivers of firm performance: This area of work examines the drivers of firm performance in more detail, i.e. the links between firm performance (e.g. productivity growth) and potential drivers of firm growth, such as technology use, human capital, organisational change, innovation, exposure to foreign competition, etc. This is a very rich area of work, and the most diverse across countries, as it relies on the availability of firm-specific data on each potential driver of growth. The discussion in this section will only focus on the issues that are discussed during the workshop, notably the role of information technology and innovation in firm growth.

. In practice, the distinction between these areas of work is difficult to make as they are closely interlinked. Work on SMEs, for example, may have an explicit focus on the dynamics of productivity growth within SMEs; or work on the drivers of firm performance may focus specifically on women-owned firms. The discussion in the different sections below therefore frequently makes cross-references to other sections, as these can be equally relevant.

2. Firm demographics: exit, entry and turnover of firms

. Firm demographics, or entrepreneurial demography, is currently of great policy interest, as the creation of new businesses and the decline of unproductive firms are regarded key to the overall dynamism of OECD economies. Many statistical offices therefore provide official statistics on the exit, entry and turnover of firms. Several studies are also available at the international level, sometimes based on official statistics, in other cases based on more limited sample surveys. This work typically focuses on the following indicators (Ahn, 2001):[2]

- The entry rate (or start-up rate), typically calculated as the number of entrants during a certain period, divided by the total number of firms in the sector. Occasionally, gross sales or employment are used as weights of the share of entrants. The gross sales measure is referred to as the entry penetration rate and the employment measure is referred to as employment-weighted entry rate. [3]

- The exit rate, typically calculated as the number of exiting firms during a certain period divided by the total number of firms in the sector. The analogous employment-weighted exit rate is calculated by dividing the employment of exiting firms by total (sectoral) employment.

- The turnover rate is the sum of entry rate and exit rate in a given sector over a given period.

. Cross-country comparisons of entry and exit are relatively rare, partly due to a range of measurement problems. The available studies show that a large number of firms enter and exit most markets every year (European Commission, 2000; OECD, 2001a; Bartelsman, et al, 2001). Must of the interest in international comparisons of exit and entry is linked to the assumption that countries that are more dynamic (i.e. experience better economic performance) should have higher rates of firm turnover. Cross-country studies of firm demographics provide evidence that there are indeed large differences in firm turnover, but do not always demonstrate that countries that perform better have the highest rate of firm turnover. The available studies also give quite different assessments of firm dynamics in OECD countries (Table 1). This may partly be due to differences in the timing of studies, but is also likely to result from methodological differences. The difference between the results by the European Commission's comparison, based on national estimates of firm turnover, and those of the recent OECD study, based on a more harmonised approach, is particularly marked.

1. Alternative indicators of entrepreneurship and firm creation

. Some other findings of the work on enterprise demography are of interest. The recent OECD work with data covering the first part of the 1990s showed that firm turnover rates (entry plus exit rates) are around 20per cent in the business sector of most countries. This implies thata fifth of firms are either recent entrants, or will close down within the year (OECD, 2001a; Bartelsman, et al. 2001). Turnover rates vary significantly across detailed industries in each OECD country, however, implying that differences in the industry composition influence international comparisons of average turnover. The OECD study covered 10 OECD countries, but similar studies exist for many other OECD countries (e.g. Australia, Belgium, Czech Republic, New Zealand, Poland, Spain, Sweden and Switzerland; see OECD, 2001b).

. The OECD work also showed that the process of entry and exit of firms involves a proportionally low number of workers. In all but two countries (Finland and Denmark), less than 10per cent of employment is involved in firm turnover, and in the United States, Germany and Canada, employmentbased turnover rates are less than 5per cent. The difference between firm turnover rates and employmentbased turnover rates arises from the fact that entrants (and exiting firms) are generally smaller than incumbents (see discussion below). The OECD work on entry has confirmed three stylised facts of a well-known study by Geroski (1995), namely that:

Entry is common. Large number of firms enter most markets every year, but entry rates are far higher than market penetration rates.
There is a large variation in entry across industries, but these do not persist for long.
Entry and exit rates are positively correlated, and net entry and penetration rates are only a small share of gross rates.

3. Entrepreneurship and the growth of firms

. The entry of new firms and the exit of declining firms are only one part of the entrepreneurial process. It is also important to understand how firms grow, which firms succeed, and why they succeed. Research in this area is quite diverse. The focus in this section is on only aspect, namely the survival process and the growth of firms. Studies that deal more explicitly with the drivers of firm growth are discussed below, notably in section 7.

. In his survey on entry, Geroski (1995) also offered a stylised fact about survival, namely that the survival rate of most entrants is low, and even successful entrants may take more than a decade to achieve a size comparable to the average incumbent. This finding is broadly confirmed by recent OECD work (OECD, 2001a). It found a high correlation between entry and exit across industries, which may be the result of new firms displacing old obsolete units, as well as high failure rates amongst newcomers in the first years of their life.

. An examination of survival rates, i.e.the probability that new firms will live beyond a given age, shows that the survival probability for cohorts of firms that entered their respective market in the late 1980s declines steeply in the initial phases of their life. In fact, about 20to 40per cent of entering firms fail within the first two years. Conditional on overcoming the initial years, the prospect of firms improves in the subsequent period: firms that remain in the business after the first two years have a 60 to 70per cent chance of surviving for five more years. Nevertheless, only about 3050per cent of total entering firms in a given year survive beyond the seventh year. A low survival rate is not necessarily a cause of concern. Entry by new firms can be seen as a process of experimentation and it is in the nature of this process that the failure rate will be high. This is particularly so if new entry leads incumbent firms to increase their efficiency and profitability.

. Regression-based analyses of survival and growth of firms has considered various factors such as firm size, firm age, capital intensity, innovation, productivity, corporate governance structure, etc.[4] Firm size and firm age are consistently important in explaining survival and growth of entrants. For firm size, smaller firms tend to have lower likelihood of survival but higher rates of post-entry growth. For firm age, older firms showed lower failure rates and lower growth rates in most regression analyses. In particular, survival analyses based on the hazard regressions suggest either negative duration dependence or a Çshaped hazard function. Hence, small new firms have both a low probability of survival in the early stages, and a high probability of fast growth if they do survive.

. These findings suggest that a heterogeneous group of entrants learn about their ability to survive and explore and adjust to the competitive environment. Each entrant starts business with different initial size reflecting differences in their own perceived ability and expectation. Those with inadequate competitiveness are forced to exit, while successful survivors grow and try to adjust themselves to the changing environment. The accumulation of experience and assets, in turn, strengthens survivors and lowers the likelihood of failure.

. Another important implication of this finding is that the technological environment and the degree of market competition influence firm dynamics. The product life cycle model also points out that the pattern of firm dynamics evolves along the product life cycle reflecting evolving stages in the market growth, scale economies, and the degree of competition. Major factors affecting firm dynamics include:

- Innovative environment: Regression analyses has shown that entrants are exposed to higher risks of failure in industries where small firms tend to have the innovative advantage. This is consistent with the prediction of the product life cycle model. Industries at the early stage of the product life cycle tend to show more turbulent firm dynamics with higher turnover rates.

- Economies of scale: In industries with large economies of scale, successful entrants would have to grow fast to reach the minimum efficient scale (MES). Regression analyses in several studies indeed report that an industry-wide measure of MES had positive correlation both with the probability of exit and with survivors’ growth.

- Competitive environment: The observation that turnover rates are higher under more innovative environments seems consistent with more general findings that industries with higher entry rates also tend to have higher hazard rates. Firms in industries with higher capital intensity or higher innovative efforts (measured by R&D intensity, use of new technologies, etc.) do show higher failure rates on average, while an individual firm’s capital intensity or innovative efforts appeared to positively related with the firm’s survival or growth. It is also reported that hazard rates are lower in growing industries while macroeconomic downturns raise hazard rates.

4. The size dimension: the role of SMEs in the economy

. Firm-level data also enable the construction of databases by size category and provide important insights in the role of SMEs in the economy. Only two strands of work are distinguished here:

- Analysis of the contribution of SMEs to overall business performance, e.g. in the context of entry, productivity or employment growth.

- Work on high-growth firms. Recent OECD work, for example, shows the importance of small firms to the process of creative destruction (Schreyer, 2000).

4.1 The contribution of SMEs to overall performance

. Small establishments make an important contribution to overall employment and turnover, although there is considerable variation across countries (OECD, 2001c; Figure 2). In the United States, for example, more than 60 percent of all employment is in establishments with over 500 employees. In Japan and Italy, these establishments account for just over 20% of overall employment. The contribution of the smallest establishments (of less than 50 employees) to total employment also varies considerably; in Turkey and Italy, they account for 46 and 52 per cent of total employment, respectively. In the United States, they only account for 15 per cent.