Firm Growth, Institutions and Structural Transformation

Magnus Henrekson () and Dan Johansson

No 820, Working Paper Series from Research Institute of Industrial Economics

Abstract: This essay argues that the economic contribution of certain firms – be they small, young or rapidly growing – has to be understood in a broader context of creative destruction. Growth of some firms requires contraction and exit of some other firms to free up resources that can be reallocated to expanding firms. Entry and expansion are flip sides to exit and contraction and the process through which the factors of production are put into different use defines structural transformation. We analyze institutions and policies conducive to structural transformation, in particular the expansion of high-growth firms (HGFs), since they have empirically been shown to contribute disproportionately to economic development. Firm growth is viewed as resulting from the continuous discovery and use of productive knowledge. Rapid firm growth requires a set of economic actors with complementary competencies that work together to identify and commercialize novel business ideas. The institutional framework determines the incentives for these individuals to acquire and utilize knowledge. We identify a number of institutions that encourage the creation of HGFs and promote structural transformation. In particular, our analysis points to the key roles played by tax structures, labor market regulation, and the contestability of service markets. Even in advanced economies, there is a large untapped economic potential which can be unleashed by institutional changes, such as the opening up of closed markets for entrepreneurial competition. However, there is no “quick-fix” that will boost the frequency of HGFs and structural transformation. Our analysis suggests that policymakers need to adopt a broad approach and implement a wide array of complementary institutional reforms to increase the prevalence of HGFs and to facilitate structural transformation.

Keywords: Entrepreneurship; Firm growth; Gazelles; High-growth firms; High-impact firms; Institutions; Job creation; Rapidly growing firms (search for similar items in EconPapers)
JEL-codes: D21 L25 M13 O10 O40 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2010-01-07
New Economics Papers: this item is included in nep-cse, nep-ent and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published in Handbook of Research on Entrepreneurship and Regional Development, Fritsch, Michael (eds.), 2011, chapter 7, pages 175-214, Cheltenham, UK and Northampton, MA: Edward Elgar.

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Working Paper: Firm Growth, Institutions and Structural Transformation (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0820

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