Alternative measures of business entry and exit
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Alternative Measures of Business Entry and Exit. By Ron Jarmin, Javier Miranda, and Kristin Sandusky September 16, 2003. Background Motivation.

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Alternative Measures of Business Entry and Exit

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Alternative Measures of Business Entry and Exit

By Ron Jarmin, Javier Miranda,

and Kristin Sandusky

September 16, 2003


Background Motivation

  • Business entry and exit, or churning, in market based economies is a fundamental process in innovation, productivity growth and improved economic performance.

  • Can differences in business dynamics help explain differences in the performance of European and US Economies?

    • Observe differences in employment growth, business entry and exit.

    • The role of policy and institutions?


Background and Motivation (cont.)

  • International comparisons of business dynamics require comparable statistics on

    • Firm entry and exit

    • Firm growth


Measurement Issues

  • Theoretical notions of entry, growth and exit refer to firms operating within markets.

  • Most empirical analyses utilize data that do not permit the accurate delineation of markets or the tracking of firms across markets.

    • This is especially the case for analyses done from business register based data.

  • We examine the sensitivity of statistics on business dynamics to alternative “market” definitions


Overview

  • Data

    • LBD

    • Establishment, Firm, Firm-Geography

  • Turnover (entry plus exit) rates

  • Entry Size

  • Post Entry Growth

  • Conclusions


Data

  • The Longitudinal Business Database (LBD) is an establishment level dataset with

    • firm (enterprise) ownership information

    • detailed geographic information

    • detailed industry information

    • firm size information.

  • Available years: 1975 to 2000 (updated annually)

  • Coverage: All U.S. business establishments in the U.S. and outlying areas with employees.


Measures

  • Turnover (Entry rate + Exit Rate)

  • Entry Size

  • Post Entry Growth

  • Computed for:

    • Firms

    • Establishments

    • Firms defined by the State boundaries


Data


Key Facts About Turnover

  • Unweighted turnover rates are not sensitive to market definition

  • Measures of turnover weighted by employment are

    • Entry and exit of firms across states lead to turnover rates that are approximately 20% higher.

  • Job turnover rates are sensitive to definition

    • approximately 10% higher when we identify firms at the state versus the nation.


Key Facts about Firm Size at Entry

  • Entry size is sensitive to choice of geographic market.

  • Size effect, while not big, persists in successive entry cohorts.

  • Measuring firms within smaller markets (e.g. States) leads to overestimates of entry size statistics.


Key Facts about Post Entry Growth

  • The expansion of operations into neighboring states is a significant contributor to firm growth.

    • about 1/3rd of total firm growth experienced by the 1977 cohort is due to firms branching into neighboring states.

  • Limiting firm growth to smaller “local” markets, such as a state, results in a significant underestimation of post entry firm growth.


Conclusions

  • Measures of producer dynamics are sensitive to the definition of the "markets" firm operate in.We find significant impacts on several key statistics:

    • Job Turnover, Entry size and post entry growth.

  • Turnover rates and the size of entrants for European countries might be smaller, and post entry growth larger, if one could track firms operating several countries.

  • Calls for caution when comparing such statistics between the U.S. and European countries.


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