Do Temporary Demand Shocks Have Long-Term Effects for Startups?

Abstract

Recent work shows that firms born in cohorts with weak job creation are persistently smaller, even when the aggregate economy recovers. As both demand-side and supply-side factors vary with the business cycle, it is challenging to establish what drives these patterns from aggregate data. We use comprehensive procurement auctions and register data from Norway to study the effect of cross-sectional variation in transient demand shocks on long-run outcomes for startups. Auction winners have more than 20% higher sales and employment than runners-up several years after the auction. They are also more profitable. Investment effects, broadly interpreted, appear important to understand the results.

Keywords: entrepreneurship, Investments, Startups

JEL Classification: D21, D24, G39, J23, L11, L25