Firm Growth, Institutions and Structural Transformation

60 Pages Posted: 22 Jan 2010 Last revised: 17 Apr 2019

See all articles by Magnus Henrekson

Magnus Henrekson

Research Institute of Industrial Economics (IFN)

Dan Johansson

affiliation not provided to SSRN

Date Written: January 7, 2010

Abstract

This essay argues that the economic contribution of certain firms – be they small, young or rapidly growing – has to be understood in a broader context of creative destruction. Growth of some firms requires contraction and exit of some other firms to free up resources that can be reallocated to expanding firms. Entry and expansion are flip sides to exit and contraction and the process through which the factors of production are put into different use defines structural transformation. We analyze institutions and policies conducive to structural transformation, in particular the expansion of high-growth firms (HGFs), since they have empirically been shown to contribute disproportionately to economic development.

Firm growth is viewed as resulting from the continuous discovery and use of productive knowledge. Rapid firm growth requires a set of economic actors with complementary competencies that work together to identify and commercialize novel business ideas. The institutional framework determines the incentives for these individuals to acquire and utilize knowledge. We identify a number of institutions that encourage the creation of HGFs and promote structural transformation. In particular, our analysis points to the key roles played by tax structures, labor market regulation, and the contestability of service markets. Even in advanced economies, there is a large untapped economic potential which can be unleashed by institutional changes, such as the opening up of closed markets for entrepreneurial competition. However, there is no “quick-fix” that will boost the frequency of HGFs and structural transformation. Our analysis suggests that policymakers need to adopt a broad approach and implement a wide array of complementary institutional reforms to increase the prevalence of HGFs and to facilitate structural transformation.

Keywords: Entrepreneurship, Firm growth, Gazelles, High-growth firms, High-impact firms, Institutions, Job creation

JEL Classification: D21, L25, M13, O10, O40

Suggested Citation

Henrekson, Magnus and Johansson, Dan, Firm Growth, Institutions and Structural Transformation (January 7, 2010). IFN Working Paper No. 820. Available at SSRN: https://ssrn.com/abstract=1539446 or http://dx.doi.org/10.2139/ssrn.1539446

Magnus Henrekson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
Grevgatan 34
Stockholm, SE-10215
Sweden
+46-8-6654502 (Phone)
+46-8-6654599 (Fax)

HOME PAGE: http://www.ifn.se/mh

Dan Johansson

affiliation not provided to SSRN ( email )

No Address Available

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