Thursday, July 19, 2018

Declining Business Dynamism (birth, growth, death) And Information Technology

From VoxEU, July 19:

Evidence from the US indicates that business dynamism is declining, and that this affects overall productivity growth. This column explores business dynamism in Belgium between 1985 and 2014. The results show remarkable similarities to those from the US, suggesting that these changes are likely due to global trends such as the rise of information and communication technology.
During his 2005 commencement speech at Stanford University, Steve Jobs famously said that death is very likely the single best invention of life, as it clears out the old and makes way for the new. Business dynamism, or the fact that new firms arise, die, expand, and contract, is generally considered to play a key role for aggregate productivity growth. Using US establishment data, Davis and Haltiwanger (1991) were the first to document such a process of creative destruction, triggering a new stream of research documenting business dynamism for other countries (Haltiwanger et al. 2014). This research showed how old, sluggish firms make way for newer, more innovative, and more productive firms. It also shows how a high level of business dynamism implies that resources can easily be reallocated from low-productivity to high-productivity activities in the economy.

While it has been well documented that the level of business dynamism varies across countries, usually due to different levels of labour and product market regulation, little is known about its evolution over a long period of time that spans various business cycles. Recent work by Decker et al. (2016) shows that, for the US, business dynamism has been declining over the past decades and that the nature of the decline changed around 2000, with a decline in (young) high-growth firms. High-growth firms are firms that have experienced an annualised growth greater than 20% over a three-year period, with at least 10 employees at the start of the growth period. Typically, young high-growth firms invest more in innovation than other firms and are thus responsible for a disproportionate share of employment and productivity growth (e.g. Acemoglu et al.2017, Haltiwanger et al.2016). High-growth firm activity is therefore often seen as a good proxy for the level of entrepreneurship in an economy.

While the decline in business dynamism has been well documented for the US, there is no work using the decades of data available for other countries. In a recent paper, we fill this gap by studying the business dynamism of Belgium’s small, open economy using 30 years of data from 1985 to 2014 (Bijnens and Konings 2018). We find a similar decline in business dynamism as in the US, which also sets in around 2000. This is remarkable as firms in the US face a far less rigid institutional environment than the ones located in Belgium.
The same secular decline in business dynamism in a small, open, European economy as in the US
In our paper we use various measures to study business dynamism. Predominantly, we based our analysis on the statistical distribution of firm employment growth rates and their evolution. In particular, we calculated the dispersion of the distribution as the difference in growth rate between a firm at the 90th and a firm at the 10th percentile of the distribution, also referred to as the 90-10 differential. The higher the dispersion, the more reallocation between firms. A second measure looks at the entry and exit of firms, which is a good indicator of creative destruction in an economy. A third indicator looks at high-growth firm activity. ....MUCH MORE