Publication: Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries
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2004
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2012-06-26
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This paper analyzes the process of creative destruction across 24 countries and 2-digit industries. This approach harmonizes firm level data across countries, enabling international comparisons and the identification of country-specific as opposed to sectoral and time effects factors. All countries display a massive reallocation of resources, with the entry and exit of many firms in all markets, the failure of many newcomers and the expansion of successful ones. This process of creative destruction affects productivity directly, by reallocating resources towards more productive uses, but also indirectly through the effects of increased market contestability. While entry and exit rates are fairly similar across industrial countries, post entry performance differs markedly between Europe and the U.S., a potential indication of the importance of barriers to firm growth as opposed to barriers to entry. Transition economies show an even more impressive process of creative destruction and those that have made the most progress toward a market economy show better outcomes.
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“Bartelsman, Eric; Haltiwanger, John; Scarpetta, Stefano. 2004. Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries. © World Bank. http://hdl.handle.net/10986/9170 License: CC BY 3.0 IGO.”
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Publication Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries(World Bank, Washington, DC, 2004-12)In this paper the authors provide an analysis of the process of creative destruction across 24 countries and 2-digit industries over the past decade. They rely on a newly assembled dataset that draws from different micro data sources (business registers, census, or representative enterprise surveys). The novelty of their approach is in the harmonization of firm-level data across countries, which enables international comparisons and the identification of country-specific factors as opposed to sector and time effects. All countries display a massive reallocation of resources, with the entry and exit of many firms in all markets, the failure of many newcomers and the expansion of successful ones. This process of creative destruction affects productivity directly by reallocating resources toward more productive uses, but also indirectly through the effects of increased market contestability. There are also large differences across groups of countries. While entry and exit rates are fairly similar across industrial countries, post-entry performance differs markedly between Europe and the United States, a potential indication of the importance of barriers to firm growth as opposed to barriers to entry. Transition economies show an even more impressive process of creative destruction and, those that have progressed the most toward a market economy show better outcomes from this process. 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Even more importantly, differences in the size composition of firms-within each industry-explain a large fraction of the overall variability in job creation and destruction. However, even after controlling for industry/technology and size factors there remain significant differences in job flows across countries that could reflect differences in business environment conditions. The authors look at one factor shaping the business environment, namely, regulations on hiring and firing of workers. To minimize possible endogeneity and omitted variable problems associated with cross-country regressions, we use a difference-in-difference approach. The empirical results suggest that stringent hiring and firing costs reduce job turnover, especially in those industries that require more frequent labor adjustment. Regulations also distort the patterns of industry/size flows. Within each industry, medium and large firms are more severely affected by stringent labor regulations, while small firms are less affected, probably because they are partially exempted from such regulations or can more easily circumvent them.Publication Investment Climate Reform, Competition Policy and Economic Development: Some Country Experiences(Washington, DC: World Bank, 2003)A survey of countries reveals that most have sought seriously to improve their investment climates through changes in their business regulatory laws, including competition policy, and administration. The survey also found that there is broad agreement that competition policy is important for economic development yet very few countries indeed have attempted to quantify the impact of competition policy. A diminishing, but still significant, number of developing countries do not have a competition law.Publication Do Crises Catalyze Creative Destruction? Firm-level Evidence from Indonesia(2011-11-01)Using Indonesian manufacturing census data (1991-2001), this paper rejects the hypothesis that the East Asian crisis unequivocally improved the reallocative process. The correlation between productivity and employment growth did not strengthen and the crisis induced the exit of relatively productive firms. The attenuation of the relationship between productivity and survival was stronger in provinces with comparatively lower reductions in minimum wages, but not due to reduced entry, changing loan conditions, or firms connected to the Suharto regime suffering disproportionately. On the bright side, firms that entered during the crisis were relatively more productive, which helped mitigate the reduction in aggregate productivity.
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