Entry, Exit, Resource Reallocation and Productivity Growth in the Tunisian Private Manufacturing Industries

Abstract

Firm entry and exit is a part of the market selection process by which resources are reallocated within or across industries. The process of entry and exit influences economic performance through firms’ internal restructuring, reallocation of resources among firms and changes in market shares of incumbents. This paper sheds light on the magnitude, characteristics and effectiveness of this process in Tunisian manufacturing industries. To this end we start by circumventing the shortage in firm demographics data by merging, for the first time in Tunisia, administrative files based on continuous reporting of fiscal affiliation of private firms with the register of firm affiliates at the National Social Security Fund in order to compile a series on the number of entering, exiting and total firms with 10 workers or more, by year and by industry over the 1996–2004 period. The empirical findings of the paper establish three basic stylized facts: a relatively high firm churning in all Tunisian manufacturing sectors; firm turnover is principally driven by small- and medium-sized firms; and the creative destruction process is the predominant factor driving entry and exit in many manufacturing industries. Moreover, the combination of heterogeneity in productivity and easy entry and exit of firms is found to characterize the manufacturing sector in Tunisia. Accordingly, obstacles to free entry and exit slow the reallocation process and are likely to slow productivity growth.