The contribution of start-ups and young firms to industry-level efficiency growth

ABSTRACT

This article examines the impact of start-ups (active for 1 up to 5 years) and young firms (active for 6 up to 10 years) on industry-level efficiency growth in six EU countries, covering the period 2002–2009. Using semi-parametric estimates of meta-frontier efficiency, it is found that surviving entrants gradually raise their efficiency level in all countries considered. Firm-level efficiency growth decreases with firm age, whereas reallocation towards efficient firms contributes more to industry-level growth as firms mature. The relative contribution of start-ups appears to have been important as they actually contributed positively to overall efficiency growth which, over the period under consideration, was negative in most countries, even before the ‘Great Recession’. There are indications of ‘cleansing’, due to the exit of less efficient firms, during the ‘Great Recession’.

KEYWORDS:

• Start-ups
• young firms
• efficiency
• entry and exit
• reallocation

JEL CLASSIFICATION:

• D24
• L25
• M13
• O33

Acknowledment

The authors wish to thank an anonymous referee for useful comments and suggestions. Remaining errors are the authors’ responsibility.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Balk (2016) showed that the theoretical appropriate weights for VA-based TFP are the real inputs valuated in VA terms at the firm level, relative to their equivalent at the industry level. As we lack information on the VA and capital deflator at the firm level, the firm’s share in the industry nominal added value is our chosen proxy of the theoretical consistent weights.

² Tables with the comparison between Amadeus and SBS are available upon request.

³ The low rate for Germany is probably partly due to sampling issues as explained in the text and should be interpreted with caution.

⁴ The general findings on firm-level efficiency discussed in this section are reported in more detail in Verschelde et al. (2014).

⁵ Results available upon request.

⁶ The data used for the decomposition show a positive correlation of 0.2 between industry-level VA growth and TFP growth.

⁷ Clementi and Palazzo (2013) argue that a positive productivity shock increases the number of entrants but their average efficiency level will be lower. As a result, output and TFP will be lower than without this selection mechanism. The higher entry rate has a permanent positive impact on long-run productivity as it increases the pool of young firms that can raise their efficiency and size over time.

⁸ Most US studies concern analyses of firm dynamics in terms of job creation and destruction and can therefore not unambiguously be compared to our analysis in terms of productivity growth, for example due to the potential trade-off between employment and productivity as discussed in the introduction.

⁹ We would like to thank the anonymous referee for suggesting the additional insight provided by a breakdown into expanding and shrinking firms.

Additional information

Funding

This work was supported by the National Bank of Belgium [contact A13/TT/0834].