An empirical analysis of business dynamics and growth

André van Stel and Bart Diephuis

No N200412, Scales Research Reports from EIM Business and Policy Research

Abstract: This paper examines the relationship between business dynamics (entry and exit of firms) and employment growth at the country-industry level. We use a cross-country data set with harmonized data on numbers of entries and exits for a selection of fastgrowing and innovative industries in six developed economies. In our regression analysis we allow for separate effects of both the extent of business dynamics (volatility of firms) and the composition of business dynamics (net-entry of firms). We also test for the existence of an 'optimal' level of business volatility, possibly indicating that entry and exit levels are too high in certain industries. We find positive employment effects of net-entry rates and volatility rates. These effects are found to be considerably stronger for manufacturing compared to services. We find no evidence for an 'optimal' level of business volatility.

Pages: 19 pages
Date: 2004-10-06
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