Entry, Growth, and the Business Environment: A Comparative Analysis of Enterprise Data from the U.S. and Transition Economies
J. David Brown
US Census Bureau Center for Economic Studies; Institute for the Study of Labor (IZA)
John S. Earle
George Mason University - School of Public Policy; Central European University (CEU) - Department of Economics; Institute for the Study of Labor (IZA)
September 1, 2010
GMU School of Public Policy Research Paper No. 2011-07
US Census Bureau Center for Economic Studies Paper No. CES-WP- 10-20
What role does new firm entry play in economic growth? Are entrants and young firms more or less productive than incumbents, and how are their relative productivity dynamics affected by financial constraints and the business environment? This paper uses comprehensive manufacturing firm data from seven economies (United States, Georgia, Hungary, Lithuania, Romania, Russia, and Ukraine) to measure new firm entry and the productivity dynamics of entrants relative to incumbents in the same industries. We contrast hypotheses based on "leapfrogging," in which entrants embody superior productivity, with an "experimentation" approach, in which entrants face uncertainty and incumbents can innovate. The results imply that leapfrogging is typical of early and incomplete transition, but experimentation better characterizes both the US and mature transition economies. Improvements in financial markets and the business environment tend to raise both the entry rate and productivity growth, but they are associated with negative relative productivity of entrants and smaller contributions of reallocation to growth among both entrants and incumbents.
Number of Pages in PDF File: 50Accepted Paper Series
Date posted: October 6, 2010 ; Last revised: March 30, 2011
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