1 Alternative Measures of Business Entry and Exit By Ron Jarmin, Javier Miranda, and Kristin Sandusky September 16, 2003

2 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?

3 Background and Motivation (cont.) International comparisons of business dynamics require comparable statistics on –Firm entry and exit –Firm growth

4 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

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7 Overview Data –LBD –Establishment, Firm, Firm-Geography Turnover (entry plus exit) rates Entry Size Post Entry Growth Conclusions

8 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.

9 Measures Turnover (Entry rate + Exit Rate) Entry Size Post Entry Growth Computed for: –Firms –Establishments –Firms defined by the State boundaries

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14 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.

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16 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.

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18 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.

19 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.