Productivity. Growth. Jobs. These are the outcomes that are at the top of many of our clients’ agendas, and they form a core part of most of our private sector development projects. But where do they come from? Who creates them?
Evidence from high-income countries suggests that the answer might be found in a group of small, young and fast-growing firms that contributes disproportionately to these outcomes at the national level. In the United States, about 50 percent of new firms will have gone out of business before the age of five (Haltiwanger et al, 2013). Among those that do survive, just 12 percent experience output growth in excess of 25 percent, but they account for 50 percent of overall increase in output. Similarly, only 17 percent of surviving firms (less than 10 percent of all that entered) experience employment growth above 25 percent – but they create close 60 percent of new jobs in the U.S. economy (Haltiwanger et al, 2016). There is undoubtedly something special about these few high-growth firms (HGFs).
One key reason that HGFs are able to perform so well is their high productivity. Firms in the 90th percentile of the U.S. productivity distribution create almost twice as much output with the same inputs as firms in the 10th percentile (Syverson, 2004). In developing countries, the gap between firms at the top and bottom ends of the productivity distribution is even larger – up to five times! (Hsieh and Klenow, 2009)
Beyond their own high productivity, HGFs raise national efficiency in several important ways. Their “pull factor” facilitates the convergence of less productive firms to the national frontier (Bartelsman et al, 2008). And when markets for production inputs are competitive, HGFs are able to lift overall efficiency by pulling resources from less productive firms. This is what accounts for their disproportionate contribution to productivity, jobs, and output growth (Haltiwanger et al, 2016).
Conversely, market distortions that prevent resources from flowing to more efficient firms explain as much as 60 percent of the difference in national productivity levels (Hsieh and Klenow, 2009). And when more efficient firms cannot get the inputs they need, firms do not grow. This is one of the reasons why, in India, for example, manufacturing plants that are 40 years old are only 40 percent larger than young manufacturing plants (under five years of age) while, in the United States, older plants are more than seven times larger (Hsieh and Klenow, 2014).
What does this mean for our clients? There is a great deal of interest in supporting the growth of HGFs in developing countries, but there is little evidence on the characteristics and policy constraints that they have to face. This is why the Innovation & Entrepreneurship unit of the Trade & Competitiveness Global Practice is launching a new flagship report on High Growth Entrepreneurship in Developing Countries.
The report aims to generate new evidence on HGFs in the developing world, documenting their incidence, patterns of growth, characteristics of their managers and employees, and linkages with other firms. As a first step, we have published a literature review on the subject on the InfoDev website.
On October 13, high-growth firms will take center stage at the seventh annual Entrepreneurship Conference hosted by the World Bank Group and the International Council for Small Business (ICSB). The event will bring together policymakers and experts from around the world to share insights on how to support HGFs in developing countries and how to promote them as a key driver of local growth and innovation.
Join the discussion online and help us learn more about what drives employment, growth and productivity!