How high-growth firms can reshape the economy
October 26, 2016 Editor 0
Productivity. Growth. Jobs. These are the outcomes that are at the top of many of our clients’ agendas, and they form a core part of most of our private sector development projects. But where do they come from? Who creates them?
Evidence from high-income countries suggests that the answer might be found in a group of small, young and fast-growing firms that contributes disproportionately to these outcomes at the national level. In the United States, about 50 percent of new firms will have gone out of business before the age of five (Haltiwanger et al, 2013). Among those that do survive, just 12 percent experience output growth in excess of 25 percent, but they account for 50 percent of overall increase in output. Similarly, only 17 percent of surviving firms (less than 10 percent of all that entered) experience employment growth above 25 percent – but they create close 60 percent of new jobs in the U.S. economy (Haltiwanger et al, 2016). There is undoubtedly something special about these few high-growth firms (HGFs).
One key reason that HGFs are able to perform so well is their high productivity. Firms in the 90th percentile of the U.S. productivity distribution create almost twice as much output with the same inputs as firms in the 10th percentile (Syverson, 2004). In developing countries, the gap between firms at the top and bottom ends of the productivity distribution is even larger – up to five times! (Hsieh and Klenow, 2009)
Beyond their own high productivity, HGFs raise national efficiency in several important ways. Their “pull factor” facilitates the convergence of less productive firms to the national frontier (Bartelsman et al, 2008). And when markets for production inputs are competitive, HGFs are able to lift overall efficiency by pulling resources from less productive firms. This is what accounts for their disproportionate contribution to productivity, jobs, and output growth (Haltiwanger et al, 2016).
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Categories: World Bank PSD
Tags: high-growth firms
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