The creation of new firms and jobs in Europe

Abstract

This paper describes research into the pattern by which firms are born, grow, contract, and die, and of their influence on employment creation and destruction. The behaviour of firms in both the USA and UK is discussed. The problems of stimulating new firm formation, and the expansion of appropriate small firms is discussed. The results have policy implications for European policy makers. A number of studies are described which have all attempted to measure the birth and death rates of firms, and their expansion or contraction, by tracking the actual change of hundreds of thousands, and in some cases millions of individual firms over a given time period, using very large computer databases. Researchers have found that the results point towards a system in which some regions declined not because of higher than average failure rates, but because they were not sharing in the growth. In one major UK study, small firms performed very well, providing 31% of all new jobs, over the 1971–81 period although consisting of only 13% of all employment. Firms employing 20 to 99 also performed well. Those in the 100 to 999 employee range only produced about the same proportion of jobs as their employment, and the largest firms, with more than 1000 employees, performed very badly. There were similarities of pattern between the results of this study and that of work in the USA, but the overwhelming USA result that most jobs stem from small firms, is not so loud in the UK, although they were a very important contributor. There is a danger of misinterpreting these highly simplified results, because we do not yet understand the complex symbiotic relationship which exists between large, medium and small firms. In the UK study job creation was heavily biassed towards the small firms. It is expansions which are creating the new jobs in the economy rather than births, and in particular, expansions from the small cohorts. It suggests that we should consider much more seriously how we can encourage and help small firms to grow. Small firm growth rather than birth appears to be a (if not the) major factor in job creation. The question of how we can stimulate expansion is examined. The relative roles of manufacturing or services are discussed and trends in the USA is used as one possible indicator of likely sectoral developments in Europe.