Firm Entry Rates Research Articles

Does electrification cause industrial development? Grid expansion and firm turnover in Indonesia

I ask whether electrification causes industrial development. I combine newly digitized data from the Indonesian state electricity company with rich manufacturing census data. To understand how electrification can cause industrial development, I shed light on an important economic mechanism — firm turnover. In particular, I study the effect of the extensive margin of electrification (grid expansion) on the extensive margin of industrial development (firm entry and exit). To deal with endogenous grid placement, I use an instrumental variable approach exploiting the location of colonial electric infrastructure and the need for an interconnected grid on the island of Java. I find that electrification causes industrial development by increasing the number of manufacturing firms, manufacturing workers, and manufacturing output. Electrification increases firm entry rates, but also exit rates, and entry accounts for most of the increase in output. This is consistent with electrification lowering entry costs, increasing competition, and forcing unproductive firms to exit more often.

Business ownership and the secondary market

I combine survey and transaction data to empirically characterize secondary markets for wholly owned businesses in the United States. While markets are active, with an estimated 2.9% of businesses sold annually, they are also frictional, with the median sale taking between 170 and 200 days. To quantify the impact of market frictions on business formation, ownership, continuation, and entrepreneurial welfare, I estimate a search and matching model of business ownership and resale using novel data from an online market. In the estimated model, removing secondary markets reduces output by almost 21%, while firm entry rates rise by 2.5 percentage points, highlighting a trade-off between firm entry and continuation that is absent in models without resale. I then characterize the planner's problem and show that buying and selling decisions will generally never be simultaneously efficient. A transaction tax used to finance a minimum income scheme for entrepreneurs raises welfare by 0.94%. Finally, I extend the model to include founding risk and find the risky economy is five times more responsive to frictions relative to the benchmark economy.

Land marketization and industrial restructuring in China

This study examines how land marketization without privatization in China influences industrial structure by utilizing China’s urban land transactions data from 2003 to 2015 and the data covering 29 industries in China’s industrial and manufacturing sector. The baseline panel-data analysis shows that a one standard deviation increase in the degree of land marketization will lead to a significant increase in the rationalization level of industrial structure, indicated by a decrease in the Theil index by 0.01, which is around 66.7% of the average annual change. The transmission mechanism is that land marketization boosts firm entry rate and market competition, leads to a lower proportion of state-owned enterprises, and also reduces the dispersion degree of firms’ TFP and improves the efficiency of resource allocation at the firm level. The systematic generalized method of moments and the instrumental variable approach are employed to deal with the possible endogeneity problem, and the main results are found to be robust. This study enriches our understanding of the reform of land marketization in developing countries: while maintaining land ownership unchanged, we can still make land use rights allocated through market means like auctions, which can result in a better industrial structure and a higher level of economic efficiency.

Red tape and industry dynamics: a cross-country analysis

In this paper, we analyze the relationship between the stringency of red tape and the entry and exit rates of firms. To do so, we use a panel dataset on firm entry and exit rates, obtained from Eurostat Business Demography, covering 22 European countries and 14 manufacturing sectors observed over the period 2013–2019. We complement the information on firm dynamics with country-level data on red tape from the World Bank’s Doing Business database. Five dimensions of red tape are considered: regulations for starting a business, construction permits, procedures for getting electricity, registering property, and contract enforcement. In addition, both the cost and the time taken to complete the administrative procedures are used as metrics of red tape. Using a difference-in-difference approach à la Rajan and Zingales (1998), we find a negative effect of administrative burdens on the entry and exit rates of firms across European countries. Moreover, we find that the negative effect is more pronounced for smaller firms. Finally, the time taken to comply with bureaucratic procedures is a greater impediment to smooth entry and exit than the monetary costs associated with these administrative barriers.

Trade policy uncertainty and new firm entry: Evidence from China

This study offers novel evidence that reduced trade policy uncertainty (TPU) in the destination market promotes domestic entrepreneurial activities in a large developing economy. Exploiting China’s WTO accession as a quasi-natural experiment, we find that Chinese manufacturing industries with greater TPU reduction are associated with relative increases in the new firm entry rate. The TPU effect is more pronounced in industries with lower entry barriers or larger irreversible investments. In addition, TPU reduction fosters new entrants through both the exporting and non-exporting margins and contributes to strengthening regional agglomeration forces. Heterogeneity across regions with varying exporting costs and entry barriers is also identified, illustrating the important synchronization between external openness and internal reform for developing economies. Last, we show that reduction in TPU intensifies industry-level competition, induces better-quality entrants, and that new firm entry plays a non-negligible role in linking TPU reduction to improved economic performance.

The impact of crime on firm entry

AbstractThe article investigates the effect of crime on firm entry rates in Italian provinces over the period 2007–2016. The extant literature focuses mainly on the relationship between crime and the sorting of new businesses. The present paper contributes to this stream of work by estimating the effect of crime on the overall propensity to engage in entrepreneurial activities across a national territory. We measure the extent to which property and violent crime affect firm entry rates using an instrumental variable approach in which the instrument for criminal activity is the effective abortion rate. Our findings suggest that crime has a negative, sizable impact on firm entry. The results are robust to alternative instrumental variables and firm entry indicators. This empirical exercise emphasizes the need to consider loss of new business activities as a downstream effect when computing the social costs of crime.

From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share

In the U.S., large firms now account for a greater share of economic activity, new firms are being created at slower rates, and workers are receiving a smaller share of GDP. Changes in population growth provide a unified quantitative explanation. A decrease in population growth lowers firm entry rates, shifting the firm‐age distribution toward older firms. Firm aging accounts for (i) the concentration of employment in large firms, (ii) and trends in average firm size and exit rates, key determinants of firm entry rates. Feedback effects from firm demographics generate two‐thirds of the effect. Prior to the decrease, entry rates rose steadily reflecting the earlier baby boom. The glut of firms due to the baby boom lead to rich transitional dynamics within the feedback effects, accounting for more than half the total change. Baby boom induced changes in the firm‐age distribution provide a driving force for the post‐WWII rise and fall in the aggregate labor share. Ignoring changes in population growth attributes all the long run decline in entry rates to a decrease in firm exit rates, which in reality have been only one‐third as large.

Monetary policy, productivity, and market concentration

We identify a new channel through which monetary policy affects productivity at business cycle frequencies. An unexpected monetary easing initially reduces average labor productivity, which then overshoots its pre-shock level. At the same time, the firm entry rate rises in response to the shock and then undershoots. Market concentration matters for the monetary transmission mechanism. In low concentrated markets, the policy shock has a negligible effect on productivity, while a sizeable one on entry. To rationalize these empirical findings, we build a New Keynesian model where the pool of heterogeneous producers is endogenous. By reducing borrowing costs and stimulating demand, a monetary easing attracts low productivity firms to the market, inducing a reduction in average productivity. However, after few periods, the resulting increase in competition cleanses the market of unproductive firms, leading to a productivity overshooting together with an undershooting of the entry rate. Market concentration affects the nature of new entrants, and alters the transmission of the shock through the extensive margin.

Innovative Growth Accounting

Recent work highlights a falling entry rate of new firms and a rising market share of large firms in the United States. To understand how these changing firm demographics have affected growth, we decompose productivity growth into the firms doing the innovating. We trace how much each firm innovates by the rate at which it opens and closes plants, the market share of those plants, and how fast its surviving plants grow. Using data on all nonfarm businesses from 1982–2013, we find that new and young firms (ages 0 to 5 years) account for almost one-half of growth – three times their share of employment. Large established firms contribute only one-tenth of growth despite representing one-fourth of employment. Older firms do explain most of the speedup and slowdown during the middle of our sample. Finally, most growth takes the form of incumbents improving their own products, as opposed to creative destruction or new varieties. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The effect of the US–China trade war on Chinese new firm entry

This study offers new empirical evidence on the connection between international trade and domestic entrepreneurial activities. Exploiting the tariff variation across industries and time during the recent US–China trade war, we find that the US import tariff increases are associated with relative reductions in Chinese new firm entry rates. The negative impact is more pronounced among industries that are dependent on US exports and with a higher irreversible investment ratio. Heterogeneity across regions with varying institutional quality is also identified. Robustness tests are provided.

Young Firms and Monetary Policy Transmission

We investigate the role of business dynamism in the transmission of monetary policy by exploit- ing the variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions that rationalizes the empirical evidence.

Forbearance vs Foreclosure in a General Equilibrium Model

We build a business cycle model characterized by endogenous firms dynamics, where banks may prefer debt renegotiation, i.e. non-performing exposures, to outright borrowers default. We find that debt renegotiations only do not have adverse effects in the event of financial crisis episodes, but a large share of non-performing firms is associated with a sharp deterioration of economic activity in two cases. First, if there are congestion effects in banks ability to monitor non-performing loans. Second, if such loans adversely affect the commercial banks’ moral hazard problem due to their opacity. Aggressive interest rate reductions and quantitative easing limit defaults and the output contraction caused by a financial crisis, without ad- verse effects on the entry of new, more productive firms. The model shows that the observed long-run trend in the share of non-performing loans might be caused by the persistent reduction in technological advancements which drive firm entry rates and firms turnover.

Dinamični turistični sektor: pregled in obeti za prihodnost

This article focuses on the dynamics of entries and exits in the tourism industry from 2006 to 2018. More specifically, it compares the entry and exit rates in each subsector of the tourism industry. Compared to other sectors of the economy, the tourism industry was much more dynamic in terms of both entry and exit rates. During and after the COVID-19 crisis, when the demand for tourism services decreased, we can expect lower entry rates of new firms and on the other hand increased exit rates. Among the sub-sectors, the most dynamic activity was observed for food and beverage service activities, followed by accommodation, especially in the pre-crisis year 2007. In the period after the post Great Recession period, more dynamism was observed in sports activities and amusement and recreation activities. Simple forecasts for the future also predict that the hospitality industry will remain among the most dynamic, which unfortunately in the COVID-19 crisis means that the number of businesses leaving this industry is predicted to be quite high.

The start-up gap and jobs

The present paper uses quarterly data from the social security registry covering the full population of Belgian firms to analyze how the secular decline in the firm entry rate affects aggregate employment. To this end, we disentangle the entry margin into two channels: the overall employment of new firms (the start-up employment) and the share of start-up employment by sector (the sectoral composition of start-ups). We find that the decline in start-up employment slowed down the growth rate of aggregate employment by 26% over the 2009Q2–2017Q1 period by shifting the age distribution of firms toward older firms. The sectoral composition of start-ups accelerated the decline in the manufacturing sector and prevented the distribution sector from a potential decline, while leaving the aggregate employment unchanged.

Markup Dispersion and Firm Entry: Evidence from Ethiopia*

AbstractThis paper examines whether and to what extent markups can influence structural transformation in a developing country by creating entry barriers. We exploit information from the Ethiopian annual census of manufacturing establishments to estimate markups and their dispersion at industry and woreda‐industry‐wide levels. We then analyse the relationship between markup dispersion and firm entry rates in local markets. Results show that higher markup dispersion significantly correlates with lower entry rates into a market, even in the presence of expected positive average markups. Specifically, an increase in dispersion from its median to the values at the 90th percentile of the distribution is related to a 4.2% point lower entry rate. This result is robust to different estimation methods as well as to different definitions of the key variables.

Innovative Growth Accounting

Recent work highlights a falling entry rate of new firms and a rising market share of large firms in the United States. To understand how these changing firm demographics have affected growth, we decompose produc­tivity growth into the firms doing the innovating. We trace how much each firm innovates by the rate at which it opens and closes plants, the market share of those plants, and how fast its surviving plants grow. Using data on all nonfarm businesses from 1982-2013, we find that new and young firms (ages Oto 5 years) account for almost one-half of growth- three times their share of employment. Large established firms contribute only one-tenth of growth despite representing one-fourth of employment. Older firms do explain most of the speedup and slowdown during the middle of our sam­ple. Finally, most growth takes the form of incumbents improving their own products, as opposed to creative destruction or new varieties.

Local institutional heterogeneity & firm dynamism: Decomposing the metropolitan economic freedom index

A nascent body of research suggests that economic freedom is positively associated with entrepreneurial activity. Most of this literature is based on cross-countries analyses, although there is significant regional heterogeneity in entrepreneurial activity and the institutional and policy context within countries. The literature also largely overlooks the potential for the entrepreneurial inducing effects of economic freedom to drive less efficient firms out of the market. Additionally, economic freedom is a multi-dimensional construct comprised of numerous underlying aspects of the institutional and policy environment, but most studies have employed a composite economic freedom measure to assess its impact on entrepreneurial activity. I contribute to these gaps in the literature by decomposing the recently developed Metropolitan Economic Freedom Index into its underlying institutional indicators to explore their potential impact on the firm entry and firm exit rates for a sample of nearly 300 US cities over the period 1972–2012.

Demographics and the Decline in Firm Entry: Lessons From a Life-Cycle Model

Since the mid-1970s, firm entry rates in the United States have declined significantly. This also holds for other OECD countries over the past years. At the same time, these economies experienced a gradual process of population aging. Applying a tractable life-cycle model with endogenous firm dynamics, we show that falling US firm entry rates can be explained by demographic transition. Specifically, our model simulations suggest that aging can account for up to one third of the observed decrease in US firm entry rates. In addition to the negative effects of a slowdown in working-age population growth on firm entry, our analysis points out that an increase in longevity may also be an important factor contributing to the decline in business dynamism, weighing on both firm entry and exit rates.

Capital Misallocation and Innovation

This paper provides empirical evidence suggesting that misallocation of capital distorts competition and impedes innovation and productivity. Using a sample of Spanish firms over the 2010 to 2016 period, we document that industries with more severe misallocation of capital have both lower exit rates of low-type firms and lower entry rates of young and innovative firms. In these industries output declines and concentration increases. Consistent with negative effects associated with a reduction in competition on innovation, we find that capital misallocation depresses patent applications, particularly in high-tech sectors, and industries with neck-and-neck competition.

Entry and Survival in the Export Market: Spillovers from Foreign and Outward-Looking Domestic Firms in Ethiopia

This paper examines spillovers from domestic-exporting and foreign-owned firms to the export entry and exit of local manufacturing firms in Ethiopia for the period 1996-2010. We find that downstream and upstream foreign-owned exporting firms improve the probability of domestic firms’ entering into export markets. Besides, foreign-owned exporting firms generate intraindustry spillovers that increase the export entry and survival rates of local firms. Spillovers from domestic exporters enhance the exporting likelihood of firms in input-supplying sectors. Moreover, exporting domestic and foreign-owned firms generate backward productivity spillovers that advance the export entry and survival of domestic firms through productivity gains.