Firm Dynamics

Measures forfirm dynamicscover a crucial aspect in the analysis of competitiveness. The birth of enterprises is thought to enhance the competitiveness of enterprises, by forcing the incumbents to become more efficient. Indeed new entrants stimulate innovation and facilitate the adoption of new technologies, and hence contribute to the increase of overall productivity within an economy105_{. The survival and develop-} ment over time of firms are important proxies of the dynamism of an economy. Exit is also important as the least-productive firms exit the market freeing up resources for the most productive.

Extensive research projects in this field have been financed by the European Commission:

• INNODRIVE – Intangible capital and innovations: drivers of growth and location in the EU (2008-2011): the project tackles the intangible questions from the viewpoint of the firms.

• COINVEST– Competitiveness, innovation and intangible investment in Europe (2008-10): the project contributes to the understanding of intangible investments as drivers of innovation, competitiveness and growth and on supporting the view that they should be treated as investments instead of inputs.

• IAREG – Intangible assets and regional economic growth (2008-10): while developing new indicators, the special focus of this project was on a) the environment affecting firms’ location and b) regional externality affecting the accumulation of intangibles.

• MERITUM – Intellectual capital guidelines for firms (1998-2001): the project elaborated a classification of intangibles and contributed in understanding how companies manage and control intangibles and whether these are relevant for equity valuation.

106. Bartelsman E., Haltiwanger J. and Scarpetta S. (2004) 'Microeconomic evidence of creative destruction in industrial and developing countries', Policy Research Working Paper Series 3464, The World Bank.

107. Bartelsman E., Haltiwanger J. and Scarpetta S. (2005) 'Measuring and Analyzing Cross-country Differences in Firm Dynamics', paper prepared for NBER Conference on Research in Income and Wealth, Producer Dynamics: New Evidence from Micro-data, 8-9 April, 2005.

Bartelsmanet al(2004, 2005)106,107_{propose other useful indicators of firm dynamics:}

Average firm size relative to entry, by age:

• Description: the evolution in average firm size of survivors as they age, corrected for possible changes in entry size of the actual survivors

• Rationale:it gives an insight to the gap between the firm size at entry and the average firm size of incumbents. The smaller relative size of entrants can be taken to indicate a greater degree of experimentation, with firms starting smalls and, if successful, expanding rapidly to approach the minimum efficient scale.

Dispersion of firms by size:

• Description: Coefficient of variation of firm size, normalised by the overall cross- country coefficient of variation.

BOX 6.7: EUROSTAT BUSINESS DEMOGRAPHY

Eurostat business demography collects statistics on the entry rate (or birth rate) of enterprises. This useful measure could be disaggregated at the sector and size level. From a theoretical point of view, enterprise birth is related to the expectation of making profits. If the main objective of newly born enterprises is to make a profit, enterprise births are most likely to occur where profits are consistently high.

The counterpart is represented by the exit rate (or death rate) of enterprises; this measure focuses on less competitive firms in the market that are unable to outlive their competitors.

The analysis should be focused also on firms’ survival rate that specifies the proportion of firms from a cohort of entrants that still exist at a given age. The rationale is to understand the post-entry performance and the market selection process that separates successful entrant firms that survive and prosper from others that stagnate and eventually exit. Since it measure the life cycle of newly born enterprises is a good measure of market selection.

• Rationale:this indicator helps to see whether cross-country differences in the dispersion differ across sectors of the economy. If technological factors were predominant in determining the heterogeneity of firm size across countries, the values should be concentrated around one. If, on the contrary, the size differences were explained mainly by national factors inducing a consistent bias within sectors, then it would be expected that countries with an overall value above (below) the average are characterised by values generally above (below) one in the sub-sectors.

Another suggested indicator is constructed to measureShift and Share Decomposition of average firm size. Both the size structure and the sectoral composition should be controlled for when analysing firms’ dynamics and its effects on aggregate performance. This indicator assesses the role of sectoral specialisation versus within sector differences and is constructed such that: the first term accounts for differences in the sectoral composition of firms, the second for cross-country differences in firm size within each sector and the last represents an interaction term, which can be interpreted as an indicator of covariance: if it is positive, size and sectoral compositions deviate from the benchmark in the same direction.

Share of gazelles

• Description: Measured in terms of employment (or turnover), gazelles are enterprises which have been employers for a period of up to five years, with average annualised growth in employees (or in turnover) greater than 20 percent a year over a three-year period and with ten or more employees at the beginning of the observation period. The share of gazelles is expressed as a percentage of the population of enterprises with ten or more employees.

• Rationale: a high weight of Gazelles might signal that the most innovative and productive companies find it easy to employ resources and gain markets shares.