The effect of firm formation and growth on job creation in the United States

This paper demonstrates the importance of new firm formation to economic growth. It begins by providing data that describe the United States as having had greater employment growth than most developed nations of the world over the last 25 years, and focuses upon why job growth in the United States has exceeded that of other nations.Job Creation by Firm Size. We first examine the data on the relative contribution of small and large firms to U.S. job growth. By summarizing research that is uniformly expressed in two-year periods and defines small firms as those with less than 100 employees, conclusive evidence emerges that small firms are the major sources of net new creation.Firm Entry/Exit Rates and Economic Growth. Further understanding of small firm job creation is obtained when we examine firm entry and exit data. Here we find that firm entry rates vary considerably from period to period (range: 10.4%–12.5%), whereas exit rates remain relatively stable from period to period (range: 9.6%–10.4%). Thus, variation in entrepreneurial activity—the formation of new firms—is the major cause of net increases in the number firms. In both the United States and the United Kingdom, net firm increases are positively related to overall economic activity.Firm Entry/Exit and Job Creation. Further exploration of this correlation can be conducted by examining job creation and loss defined by source: entries, expansions, exits, and contractions. The data for 1976 through 1984 shown here demonstrate that new entries account for 74.0% of the 50.8 million new jobs created. Expansions of existing firms accounted for 26.0%. Small firms (less than 500 employees) produced 54.6% of the entry jobs and 56.8% of the expansion jobs.On the other hand, job losses totaled 33.8 million, 79.0% due to exits and 21.0% to contractions. Small firms account for 53.6% of the jobs lost from exits and 47.8% of those lost from contractions. Overall, small firms account for 60.5% of the 17.0 million net new jobs.Given the data that show correlation between net firm formation rates and economic growth, the finding that entry rates vary more than exit rates, and the finding that new entries create most of the new jobs, it can be concluded that firm formation—especially small firm formation—is a significant factor in economic growth. Increases in small firm formation rates have a significant effect on net job creation.Schumpeter's Model and Observed Market Turbulance. Another finding from this data on job creation by entry, expansion, exit, and contraction is the large amount of job creation and destruction activity taking place. For the period studied, three jobs were created and two jobs destroyed for each net new job created. This describes a turbulent job market with many workers moving from job to job. The labor markets are much less stable that normally envisioned.This observed phenomenon fits well with Schumpeter's theory of capitalism; he proposes that capitalistic growth occurs because entrepreneurs use innovations to form new firms which enter existing markets. When successful, these growing new firms destroy existing market structures, causing decline of established firms while creating increased demand and producing overall economic growth. If Schumpeter is correct, one would expect to find high rates of firm formation and failure, and large numbers of jobs created by new firms, while many jobs are lost by exits and contractions of established firms. The findings reported here show this.Government Policy Affects on Entry/Exit. Our results also show that formation of small, new firms is a necessary requirement for economic growth. Historically, however, Government policy has not considered small firm entry as a central issue. Thus, government policies can and have had a negative effect on entry rates and therefore upon economic growth rates.Furthermore, high rates of new firm formation cause a great deal of turbulence in labor markets, with three jobs created and two lost for every one net new job. Such labor turbulence may be seen by policy makers as undesirable as it entails considerable worker movement from job to job. As such, policy makers have recently proposed policies to protect workers from job loss due to contractions and exits. However, such protection policies, as demonstrated in recent European experience, will also construct barriers to entrepreneurial entry. The result may be a decline in small firm entry and a decline in economic growth.Instead of protecting specific jobs, appropriate policies are those that facilitate movement of workers from job to job. Adequate unemployment compensation for short term unemployment, fully vested and portable pension plans, and retraining programs are examples of policies that allow the labor market to remain flexible while reducing the negative effect on those who lose jobs.     

Formation,growth and survival; Small firm dynamics in the U.S. Economy

Four out of five new firms fail within the first five years. This statement has been made so many times that most people believe it is true. But it isn't. In fact, using a relatively new data source developed by the U.S. Small Business Administration, we found that on the average, 39.8 percent of new firms survive six or more years. This is equivalent to a failure rate of three out of five, substantially lower than popularly believed.Survival rates vary by industry with manufacturing having the greatest (46.9 percent) and construction the smallest (35.3 percent). More important, however, is the discovery that survival rates more than double for firms that grow. Even a small amount of growth boosts the average survival rate to 66.3 percent; that is two out of three growing firms survive. The earlier in the life of the business that growth occurs, the higher the chance of survival.But, most firms do not grow in the first four years. On average, only ten percent of firms show growth in the first four years. By the sixth year, however, 34.3 percent of the firms show growth and over fifty percent show growth within eight years.To put the old adage to rest, two out of five new firms survive at least six years and over half of the survivors grow.     

The Shadow of Death – An Emperical Analysis of the Pre-Exit Performance of New German Firms

This paper makes an empirical contribution to the confirmation of the stylized fact that the performance of firms deteriorates in the years before exit. For this reason it is evaluated whether market exits differ significantly in their employment development in the years before market drop-out compared to surviving firms that have been selected using a non-parametric matching approach. The comparison of the employment growth rates among both groups reveals that the matched surviving firms experience higher growth rates compared to their exiting counterparts up to three years before market exit. Moreover, differences exist between Eastern and Western Germany due to various reasons.     

Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A

This paper examines firm-level determinants of mature firm exits after economic distress. Using nested logit models and a sample of 6,118 distress-related exits in Belgium, we analyze the type of exit that distressed firms experience. We show that 41% of the firms in our sample exit through a court driven exit procedure (mainly bankruptcy), 44% are voluntarily liquidated and 14% are acquired, merged or split (hereafter M&A). Distressed firm exit follows two distinct stages. First, a firm either decides to exit voluntarily or is forced into bankruptcy, which is the least efficient exit strategy. Compared to bankruptcy, the probability of a voluntary exit increases with higher levels of cash, lower leverage, holding no secured debt and being embedded in a group. If a firm exits voluntarily, it enters a second stage and decides either to exit through voluntary liquidation or through a M&A. Conditional on not going bankrupt, the likelihood of voluntary liquidation compared to M&A increases with higher levels of cash or secured debt, with smaller size and with an absence of group relations. We contribute to the firm exit literature by jointly analyzing three exit types and showing that bankruptcy and voluntary liquidation are fundamentally different exit routes. While voluntary liquidation is an important exit route for distressed firms, most previous studies have failed to distinguish between bankruptcy and liquidation. We hence contribute to the exit literature by showing that bankruptcy, voluntary liquidation and M&A are fundamentally distinct exit routes for distressed firms, driven by different firm level characteristics and following a two-stage process.     

Entrepreneurial founding team exits in rapidly internationalising SMEs: A double edged sword

Entrepreneurial founding teams (EFTs) are often essential to new venture creation and successful internationalisation. Although the composition of EFTs has been the subject of enquiry, little research exists into the exit of team members and the consequences for rapid internationalisation. We focus on EFT exits in rapidly internationalising small firms and develop categories of EFT exits. We explore the motivations and subsequent impact on internationalisation of case firms to illustrate each category/type of EFT exit. We find that exits are prevalent in the early stages of ventures, and may be either consensual or non-consensual. There are a number of motivations evident and EFT exits are often critical to continued internationalisation. We offer that EFT exits are not always negative, they can allow for the appropriate deployment of resources, extending RBV/KBV as whilst much research effort has been devoted to establishing what new resources/knowledge should flow into a firm, we show that to shed an EFT member and redeploy resources/knowledge can act as a catalyst to further internationalisation. Finally we discuss research, managerial and policy implications.     

Small and Medium Enterprises in Thailand: Recent Trends

This paper reviews the evolution of small and medium firms in Thailand in recent years. It shows that such firms did not preserve their share of total employment during the period 1987–96; indeed, their share fell from 60% to 52% over this period. Much of this decline was felt in the category of very small firms (with less than 10 workers). This aspect is explored further by looking at small firm employment shares in three sub-periods of varying overall economic growth rates. It is found that when overall economic growth is high, the share of small firms tends to contract possibly because many small firms become medium in size and others disband because their owners can find more remunerative employment in larger firms. In slower growth periods, the employment share of small firms appears to rise probably because larger firms may be taking in less new workers or even laying off workers. The paper also calculates productivity measures (technical efficiency and total factor productivity) and shows that different measures give different rankings by size of firm.     

TMT Departures and Post‐IPO Outside Director Additions: Implications for Young IPO Firms’ Survival and Performance

We draw on resource‐based logic to argue that relatively stable TMTs and boards are beneficial for young IPO firms because of the need to maintain and develop valuable firm‐specific capabilities and psychological attachment of pre‐IPO TMTs. Using panel data from 272 young IPO firms, we find that pre‐IPO TMT member exits negatively affect young IPO firms’ survival and performance. This negative effect is greater when more post‐IPO outside directors are added. We also find that the above interaction is positively and negatively associated with survival and performance when TMT ownership declines substantially and when firms have a founder CEO, respectively.     

Entry,growth and survival of manufacturing firms

This paper examines the interactions between entry size, growth rate, and probability of survival of firm. Standard microeconomics states that firm growth stems from relative efficiency differentials and that growth positively affects the likelihood of survival. Therefore, the selection hypothesis is unable to explain how a wide number of small newly born firms can survive at length even without growth and how an even larger set of firms with a higher than average growth rate exits the market in the first few years after the foundation. It is shown that one way out of these apparent paradoxes is to relax the hypothesis of a one-to-one link between initial relative efficiency and survival, and then develop a model based on different entry modes and growth patterns of the newly born firms.     

A method for calculating export supply and import demand elasticities

This article has a dual aim. First, it sets out to underline a learning-by-exporting effect in Spanish firms between 1991 and 2002. It further seeks to outline the conditions allowing firms to benefit from these spillover effects. Using a propensity score matching method, a group of firms having entered the export market (treatment group) is compared with a similar group of non-exporting firms (control group), and difference-in-differences regressions are carried out. The results show a cumulative productivity differential of 32% for the first four years of exporting, with continuous improvement in productivity. After three years of exporting, productivity gain is still approximately 10%. This study shows that increases in capacity utilisation and competitive pressure from foreign markets are insufficient to explain this causal link between exporting and total factor productivity (TFP). It is thus possible to deduce the presence of a learning-by-exporting effect, benefiting firms with sufficiently qualified employees and which are already engaged in international relations (due to foreign suppliers and/or foreign equity participation).     

Which Firms Exit and Why? An Analysis of Small Firm Exits in Japan

This paper examines exit behaviour of small firms by using data from The Survey of Retirement of Small Firm Managers, which provides information on exit and post-exit behaviour of Japanese small firms and their managers. First, it is shown that small firm exits occur not just because of economic difficulties in their business (‚economic-forced exit’) but also for various other reasons (‚non-economic-forced exit’). Logit estimates show that the probability of economic-forced exit is significantly higher if the manager is relatively young and male, the firm has loans from a financial institution, its sales are tending to decrease, and so on. It is also shown that a rather large proportion of managers continue to work after exit, and this proportion, especially that of employed workers, is higher in the case of economic-forced exits. These results indicate the potential importance of distinguishing these two classes of exits in exit studies.      

Testing "Gibrat's Law" for Young Firms – Empirical Results for West Germany

The present paper deals with the question whether "Gibrat's law" is applicable to firms founded between 1989 and 1994 within the West German manufacturing sector or not. We find that firm size follows approximately a log normal distribution. Within the context of the econometric analyses conducted in the present study, firms are subdivided into young firms belonging to technology intensive and non-technology intensive branches as well as in different size classes. A method introduced in Chesher (1979) is used to explore "Gibrat's law" in order to examine the influence of firm size on growth. Using data from the ZEW-Foundation Panel (West), "Gibrat's law" is rejected for the group of young firms belonging to technology intensive branches as well as for those operating in non-technology intensive branches in all periods examined but no significant differences between both firm groups can be observed. This confirms the results of a number of empirical studies over the last few years, indicating that smaller firms have larger growth potential than larger ones.     

The Dilemma of Growth: Understanding Venture Size Choices of Women Entrepreneurs

In recent years the number of women-owned firms with employees has expanded at three times the rate of all employer firms. Yet women remain underrepresented in their proportion of high-growth firms. A number of plausible explanations exist. To develop richer insights, a two-stage research project was undertaken. A mail survey was sent to a sample of female entrepreneurs to assess motives, obstacles, goals and aspirations, needs, and business identity. Based on the survey results, follow-up, in-depth interviews were conducted with entrepreneurs, selecting equally from modest-growth and high-growth ventures. In terms of quantitative findings, growth orientation was associated with whether a woman was "pushed" or "pulled" into entrepreneurship, was motivated by wealth or achievement factors, had a strong women's identity in the venture, had equity partners, and believed women faced unique selling obstacles. The qualitative research made clear that modest- and high-growth entrepreneurs differ in how they view themselves, their families, their ventures, and the larger environment. The results of both stages suggest that growth is a deliberate choice and that women have a clear sense of the costs and benefits of growth and make careful trade-off decisions.     

Sovereign debt crises and credit to the private sector

We use micro-level data to analyze emerging markets' private sector access to international debt markets during sovereign debt crises. We find that these crises are systematically accompanied by a decline in foreign credit to domestic private firms, both during debt renegotiations and for over two years after restructuring agreements are reached. This decline is large, statistically significant, and robust. We find that this effect is concentrated in the non-financial sector and is different for firms in the exporting and in the non-exporting sectors. We also find that the magnitude of the effect depends on the type of debt restructuring agreement.     

全球生产网络、俘获效应与集群企业转型升级——整合性分析框架与政策建议

随着全球生产网络理论的兴起,嵌入跨国公司所主导的全球生产网络已经成为发展中国家产业集群以及集群内企业转型升级的重要选择,但是这一过程中集群企业却往往会产生"俘获效应"并陷入"低端锁定"的不利局面。对此,基于跨国公司因素、集群环境因素和企业自身因素系统构建了导致集群企业产生"俘获效应"的三维度整合性分析框架,然后基于此分析框架并结合我国企业众多成功案例,从企业和政府角度系统提出了促进全球生产网络条件下我国集群企业规避"俘获效应"实现成功转型升级的策略选择。     

Early teams: The impact of team demography on VC financing and going public

This study investigates how top management team (TMT) demographic characteristics affect firm outcomes for young high technology firms in Silicon Valley. We study how team composition and turnover shape an entrepreneurial firm's ability to attract venture capital and its ability to successfully complete an initial public offering. We find that broad access to information by virtue of having top management team members that have worked for many different employers (diverse prior company affiliations) and have diverse prior experiences (functional diversity) tend to be associated with positive outcomes. In addition, entrants to and founder exits from the TMT increase the likelihood that a firm achieves an IPO. TMT exits, in turn, reduce the likelihood of achieving an IPO. Results also suggest that prior human capital experience is consistently associated with positive firm outcomes. These findings suggest that team experiences, composition and turnover are all important for bringing new insights to the firm and are associated with the likelihood that an entrepreneurial firm will succeed.     

The domestic content of Mexico's maquiladora exports: A long-run perspective

This paper studies the domestic value-added content of exports by Mexico's maquiladoras (export-processing firms) during the period from 1981 to 2006. We combine a specific input–output table for maquiladora firms with detailed longitudinal data on outputs and inputs. Policy shifts and major currency devaluations (both taking place in 1982 and 1994) drastically altered the foreign sourcing structure of most maquila firms and conditioned their demand for domestic inputs in the years thereafter. A long-run gradual decline in aggregate domestic value added in maquiladora exports is largely accounted for by the falling domestic content within electronics manufacturing.     

Bank strategies toward firms in decline

Small firms are usually in constant need of funds. In addition, when they are in decline, it puts them in a weak and dependent relationship with a commercial bank. The strategy followed by the bank toward these firms is a powerful influence on their success in turnaround and their very existence. In order to identify generic strategies followed by banks, this exploratory study analyzed data on bank responses to 192 client firms. These firms have been classified as problem loans, i.e., there is an actual default or the bank perceives a potential default on their loans. As this problem in the firm arises largely out of weakness in its primary sources of payment, which is operations, problem loans are firms in the early stages of decline.Using factor analysis, four distinct strategies toward these firms were identified: (1) managerial, involving efforts to influence strategy and operations of the firm through suggestions and recommendations; (2) financial, involving efforts to safeguard the security interests of the bank by seeking additional collateral and guarantees; (3) legal, involving recovery of funds through courts; and (4) restructuring, including efforts to improve capitalization.The firms were clustered into six groups using factor scores. Thumbnail profiles of each cluster showed the groups to be distinct. Finally, three sets of contextual variables representing firm/loan characteristics, event triggers, and the bank/client relationship were used to discriminate among the clusters of firms.The variables found to be significant in discriminating among the groups and thus impacting the strategies followed toward them included: firm size, the secured status of the loan, the bank's perception of whether the decline was due to internal or external reasons, severity of the problems facing the firm, and cooperation of the client. Significantly, the extent of loss incurred by the firm and years as a client did not make a difference to the strategy used. Where reasons for decline were largely external to the firm, financial and merger strategies were preferred. When the causes were internal, managerial and legal strategies were important. Firm size was significant; banks were less inclined to adopt managerial and financial strategies toward small as against medium-sized firms.These findings point to important lessons for managers in their dealings with banks. Banks, generally, prefer to work with clients toward a turnaround rather than resorting to legal means of recovery. To take advantage of this attitude, firms need to demonstrate cooperation to secure favorable terms, as long as the bank's funds are fully secured. Moreover, because bank strategies are dependent on their perceptions of the causes of the problems, managers need to recognize the importance of providing appropriate information to create the right perception.     

Survival of high tech firms: The effects of diversity of product–market portfolios, patents, and trademarks

High tech firms can mitigate potential risks by diversifying their product–market portfolios. A key research question is how such diversification influences firm survival. A firm exits the market in two ways, specifically, dissolution and acquisition. Here, we model how the diversity of a new firm's product–market portfolio influences the times to both types of exits. Specifically, we allow for interaction effects of the competitive intensity of a firm's environment and the diversity of a firm's product–market portfolio with its patents and trademarks. Using a competing risk hazard model, we estimate the effects of various covariates on the time to exit for 1435 US high tech firms.We observed that a more diverse product–market portfolio, in conjunction with a larger number of patents, hastens the time to a firm's exit by dissolution (9% decrease in survival duration), while in conjunction with a larger number of trademarks, portfolio diversity delays the time to exit by dissolution (12% increase). A more competitive firm environment results in a greater effect on the portfolio's diversity in delaying its exit by dissolution (7% increase). On the other hand, a diverse product–market portfolio, combined with either a larger number of patents or trademarks, hastens the firm's exit by acquisition (19% and 11% decrease respectively).     

The Cultural Paradigm of the Smaller Firm

This paper presents the findings from an ethnographic study of organizational culture and shared values in four smaller firms, the outcome of which was the identification of the cultural values shared between owner–managers (OMs) and employees in each firm. The research employed Schein's conceptualization of culture as a three-layer phenomenon, consisting of surface artifacts, shared values and beliefs, and basic assumptions. The analytical technique of grounded theory was employed to process the large volume of data gathered during the extended research period. The data reveal a complex array of values in each firm, with only one firm exhibiting a homogenous culture where values are shared by all those working in the organization. In the remaining three firms, five values appear to be shared by all employees; however, this is overlaid by a pattern of subcultures differentiated by distinctive shared values. Interfirm analysis among the four firms found that the values of survival, independence, control, pragmatism, and financial prudence were shared by two or more firms. The research collectively defines these shared values as the cultural paradigm of the smaller firm.     

Firm exits as a determinant of new entry: Is there evidence of local creative destruction?

This study posits that a local process of creative destruction provides an impetus to regional industrial renewal. We argue that exits of older firms release resources that stimulate local entry. New entrants add value to these resources by redeploying them in more productive uses. We test our hypotheses with a unique longitudinal database encompassing the entry and exit of Canadian manufacturing enterprises. We find that exits of old firms increase entry and that on average new entrants are more productive. Persistent high local rates of exit, however, deter entry.