Firm Dynamics and Job Creation:Gazelles – Born or Made?

Mary Hallward-DriemeierWorld Bank

Preliminary, Not for Citation

Who Creates Jobs:Size or Age?

• Haltiwanger, Jarmin and Miranda (2010) focuses on age rather than size as a key determinant of JC

• Hsieh and Klenow (2012) show the dynamics are different in developing countries, with greater frictions to reallocation as part of the explanation.

• Sutton (2010) looks at the largest Ethiopian manufacturing firms – less than 5% started small. Similar results hold in Ghana. Is there a missing middle?

• Across developing countries, are gazelles born or made?

Simple Answer: EntryEspecially of large firms

After entry, net job creation is much smaller.

With some evidence that larger firms add more jobs over time. And cumulative effects can be significant.

While few large firms enter, they are large enough to create most jobs

Large firms’ contributions to JC after entry vary across countries

In Morocco, large firms’ JC is relatively lower – although all size classes grow more on average than in Chile.

Large outliers play a bigger in Chile

Defining “Age”: Entry or Theshold?

• Chile has L>=10 threshold; Morocco does not• Chile does not ask for age; Morocco does

But large firms destroy jobs too• More micro firms exit – but destroy fewer jobs• Share of exiting firms by size are smooth across age

Critical to include job destruction – particularly from exit

JC is concentrated in the early years – particularly for the large

Age and size explain creation beyond birth

More action remains in initially-larger firms in Chile too

For destruction as well as creation

Cohort vs Time Effects

Over time, JC (and JD) is in older, larger firms

Chile

Growth is usually not sustained – or related to initial size after 2-3 years.Exit -0.5-<-2 -0.15--0.5 -0.05- -0.15 -0.05-0.5 .05-.15 .15-.5 .5-<2

-0.5-<-2 29.89 8.05 10.34 2.3 6.9 2.3 12.64 27.59

-0.15--0.5 29.21 8.99 17.98 4.49 8.99 3.37 14.61 12.36

-0.05- -0.15 30 5 12.5 0 12.5 15 20 5

-0.05-0.5 27.36 8.02 12.26 4.25 11.79 5.19 18.87 12.26

.05-.15 28.81 15.25 11.86 8.47 8.47 5.08 11.86 10.17

.15-.5 23.88 8.21 17.91 2.24 11.94 5.97 20.15 9.7

.5-<2 23.56 18.85 12.57 2.09 6.81 6.81 17.28 12.04

GROWTH RATES 5-10 YEARS

GRO

WTH

RAT

ES 0

-5 Y

EARS

Exit -0.5-<-2 -0.15--0.5 -0.05- -0.15 -0.05-0.5 .05-.15 .15-.5 .5-<2Micro (1-9) 28.14 8.54 13.32 1.51 12.31 4.77 17.34 14.07Small (10-19) 26.7 12.5 14.77 4.55 6.82 7.39 15.91 11.36Medium (20-49) 26.98 17.46 11.9 3.17 7.14 3.17 17.46 12.7Large (50-149) 35.79 8.42 10.53 9.47 4.21 7.37 16.84 7.37V. Large (150+) 36.36 9.09 15.91 0 9.09 6.82 9.09 13.64

INIT

IAL S

IZE

GROWTH RATES IN YEARS 5-10

So large tend to stay large – and only a few join their ranks (Morocco)

Exit 1-9 10-19 20-49 50-149 150+1-9 0.259 0.806 0.157 0.030 0.006 0.00010-19 0.224 0.232 0.525 0.202 0.035 0.00520-49 0.233 0.089 0.126 0.519 0.207 0.05950-149 0.188 0.000 0.029 0.125 0.596 0.250150+ 0.121 0.020 0.000 0.059 0.098 0.824Si

ze a

t birt

h

Size if survive to age 5

Exit 1-9 10-19 20-49 50-149 150+1-9 0.459 0.754 0.161 0.070 0.015 0.00010-19 0.436 0.317 0.372 0.228 0.069 0.01420-49 0.419 0.077 0.192 0.452 0.231 0.04850-149 0.469 0.015 0.044 0.176 0.382 0.382150+ 0.448 0.063 0.031 0.000 0.031 0.875Si

ze a

t birt

h

Size if survive to age 10

Pattern is similar in Chile

If survive to age 5Exit 10-19 20-49 50-149 150+

10-19 0.453 0.770 0.208 0.020 0.00220-49 0.375 0.238 0.616 0.141 0.00550-149 0.395 0.026 0.239 0.613 0.122150+ 0.380 0.012 0.000 0.188 0.800

If survive to age 10Exit 10-19 20-49 50-149 150+

10-19 0.687 0.676 0.294 0.029 0.00020-49 0.613 0.271 0.513 0.202 0.01450-149 0.616 0.040 0.195 0.591 0.174150+ 0.597 0.018 0.054 0.161 0.768

Transitions among larger population also show limited mobility

• Looking at whole age distribution, transition rates are lower among older firms, reinforcing that large firms come from firms that were already large

1-9 10-19 20-49 50-99 100-249 250-499 500+1-9 0.901 0.144 0.018 0.004 0.001 0.000 0.00010-19 0.085 0.753 0.103 0.013 0.004 0.001 0.00220-49 0.012 0.093 0.797 0.136 0.019 0.006 0.00550-99 0.001 0.008 0.070 0.752 0.107 0.011 0.005100-249 0.001 0.002 0.009 0.090 0.808 0.166 0.020250-499 0.000 0.000 0.001 0.004 0.057 0.754 0.127500+ 0.000 0.000 0.001 0.001 0.005 0.062 0.841

Size

at t

Size at t+10

Productivity by Age and Size of EntryChile

• Larger firms are more productive; with greater variance too

•Limited improvements over time; limited evidence of rapid ‘learning’ upon entry

Are large firms born or made?• Greatest job creation is at entry• Greatest annual growth is in first 2-5 years

– Rates of growth are not that correlated with initial size or with initial and subsequent growth

• Transitions across growth classes are only very marginally more likely over time

• Most large firms are born that way; of existing large firms 80-85% were large at entry. But:– Within 10 years, 45-65% will have exited– Large initial size does not reduce survival probabilities significantly (although

some effect in Chile)– Work in progress indicates initial productivity is limited predictor of survival;

link becomes stronger especially for larger firms– Formerly large firms that downsize, disproportionately exit in subsequent

years and few return to the highest size levels