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What drives the dynamics of business growth?

This paper aims to shed light on the factors that shape the distribution of firm growth and on what role policies play in driving cross-country differences.

Nesta Working Paper 14/03
Issued: March 2014
JEL Classification: D92, L11, O49
Keywords: growth, firm dynamics, productivity

Abstract

Notwithstanding the growing body of evidence documenting large cross-country differences in firm growth dynamics, our understanding of what drives them is still rather limited. This paper seeks to help close this gap. Using unique data for ten countries the analysis sheds light on the factors that shape the distribution of firm growth and on what role policies play in driving cross-country differences. The paper provides new evidence on the link of labour market regulation, bankruptcy legislation, financial market development and R&D support policies with growth dynamics. The study goes beyond looking at differences in average growth rates as it analyses changes in the whole distribution of firms.

The results show that financial development, higher banking competition and better contract enforcement are associated with a more dynamic growth distribution, with a lower share of stable firms and higher shares of growing and shrinking firms, and with a more rapid expansion and contraction at the extremes of the growth distribution. Stringent employment protection legislation, as well as generous R&D fiscal incentives, are associated with a less dynamic firm growth distribution, with more stable firms and fewer growing and shrinking firms. The direction of the link between bankruptcy regime and growth dynamics is less clear-cut and varies according to the capital intensity and the dependence on external finance of the sector considered.

Authors
Albert Bravo-Biosca, Chiara Criscuolo, Carlo Menon

Authors

Albert Bravo-Biosca

Albert Bravo-Biosca

Albert Bravo-Biosca

Director, Innovation Growth Lab

Albert is Director of the Innovation Growth Lab.

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