A look at business growth and contraction in Europe

Albert Bravo-Biosca

Nesta Working Paper 11/02
Issued: December 2011
JEL Classification: D92, L11, O49
Keywords: growth, firm dynamics, productivity

Abstract

We use a new database on business growth dynamics across countries developed in partnership with researchers and statistical agencies in 11 countries to examine the distribution of business growth in Europe and compare it to that in the US. We find that differences in growth dynamics go beyond the much documented gap in high-growth firms. Specifically, the data shows that European countries have both fewer growing and shrinking firms than the US. Instead, Europe has a much larger share of firms that remain static. This gap is not explained by differences in industry composition, and it arises across all sectors. Similarly, it is common across different size classes (although there is some evidence suggesting that it is particularly difficult for medium-sized firms to challenge large firms in Europe).

Given their current policy relevance, we also explore the characteristics of Europe’s high-growth firms (3-6% of firms), which we find account for between a third and a half of jobs created by all surviving firms with ten or more employees. Young firms are more likely to achieve high-growth, but most high-growth firms are older than 5 years old. They also emerge in all sectors of the economy, and can be of all sizes. Finally, we discuss the links between a dynamic growth distribution and productivity growth. We find that there is a positive correlation between the share of high-growth and fast shrinking firms. Moreover, it is this ‘creative destruction’, rather than the share of high-growth firms per se, which is associated with faster productivity growth, particularly as countries get closer to the technology frontier. We conclude with some policy recommendations.

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