Job Creation and Life Cycle of Firms

Jobs challenges are huge both in the developed and developing world: Worldwide 200 million people –many of them youth – are unemployed and looking for work.  Using data across 120 developing countries, this talk focuses on job creation and investigates which firms are most productive, employ the most people, and generate the majority of jobs.  Results suggest that small and medium enterprises are comparable to large firms in their contribution to aggregate employment; but it is the small firms that are important contributors to total job creation, even after controlling for firm age. However, small firms also have lower productivity growth than large firms.

Understanding firm-dynamics and life cycle is an important part of this agenda; hence the talk also presents findings on whether or not firms in developing countries grow as they age; and what characteristics explain the variation in life cycle. We find the average 40 year old plant in developing countries employs nearly 5 times as many people as the average plant that is less than five years old.  While the upward sloping age-size profile is pervasive in the vast majority of countries, there is also a great deal of variation in how fast firms grow as they age.  We see that institutional factors are important in explaining the growth of firms; but firm-level factors are comparable or even dominate country level factors in explaining size and growth over the life cycle.  Looking at determinants of entrepreneurial success in early life-cycle of the firm, we see size at birth is a key determinant. Firms’ initial size is in turn strongly influenced by access to finance, human capital as well as demand.