Determinants of firm start-up size in the Brazilian industry: an empirical investigation

Abstract

The article investigates the determinants of newly created industrial establishments in Brazil in 1997 taking as reference explanatory variables referring to market structure and industry dynamics, stronger effects are detected for larger firms. Minimum efficient scale, industry size, industry growth and turbulence display the expected positive effects on firm size, but the intensity of those are more pronounced for larger firms. The suboptimal scale variable, on the other hand, exhibits a counterintuitive positive effect and perhaps other types of barriers to entry that are not related to scale aspects may be important in the Brazilian case.

Acknowledgements

The author acknowledges research assistance from Renato Dirk, Ricardo Wyllie and Fabiana Gonçalves, and also financial support from FAPERJ and CAPES at different stages of the project. Finally, the cooperation of Vera Marina (Ministry of Labour, Brazil) in allowing access to the data used in this study is gratefully acknowledged.

Notes

¹ There is some evidence that the creation of new small firms is sensitive to macroeconomic fluctuations as for example those related to business cycle and interest rate (see Mata, 1996). More recently, after the introduction of a flexible exchange rate regime in 1999, macroeconomic uncertainty has been largely associated with the volatility of the expectations of short-run investors.

² Useful introductions to the topic appear in Judge et al. (1988, Chapter 22), Buchinsky (1998) and Koenker and Hallock (2001).

³ Mata and Machado (1996) adopted the proxy for MES suggested by Lyons (1980) that revealed untenable in the present application. In this sense, one considers the proxy suggested by Sutton (1991) and implemented by Görg et al. (2000) and Görg and Strobl (2002).

⁴ In fact, the traditional taxonomy for barriers to entry proposed by Bain (1956) also stresses the importance of barriers reflecting absolute cost advantages and preference for the established brands.

⁵ A less used measure was suggested by Beesley and Hamilton (1984) who considers the sum of gross entry and exit rates.

⁶ There are heavy fines for the establishments that fail to provide the referred information.

⁷ The necessity of identified microdata for this kind of study did not allow the consideration of a more recent period for which formal authorization for data use was not obtained.

⁸ Görg and Strobl (2002) consider a similar study for Ireland but with a slightly different focus as one is especially concerned with the role of ownership (for example multinational) in the determination of firm start-up size. The importance of the type of entrant on entry patterns had also been recognized by Mata et al. (1995).

⁹ This heterogeneity with respect to the growth in different quantiles was somewhat expected. In fact, Resende (2004) obtained evidence suggesting a strong rejection of Gibrat's law for the Brazilian manufacturing industry taking as reference the same data source.