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Growth Dynamics

Growth Dynamics

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Published by Nesta
As European economies recover from the recession, they face significant challenges. Not least of them is the perennial productivity problem: European businesses are not as productive as those in the United States, and this gap has been widening since the mid-1990s. In a unique project, 11 countries in Europe, North America and New Zealand worked together to produce a new database that measures how quickly businesses grow or shrink in each country, allowing a much better statistical overview of business dynamism to be developed.
As European economies recover from the recession, they face significant challenges. Not least of them is the perennial productivity problem: European businesses are not as productive as those in the United States, and this gap has been widening since the mid-1990s. In a unique project, 11 countries in Europe, North America and New Zealand worked together to produce a new database that measures how quickly businesses grow or shrink in each country, allowing a much better statistical overview of business dynamism to be developed.

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Published by: Nesta on Nov 25, 2010
Copyright:Attribution Non-commercial

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Research report:
November 2010
Growth Dynamics
Exploring business growth andcontraction in Europe and the US
Albert Bravo Biosca
 
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Executive summary
In the aftermath of the recession, countriesacross Europe face a range of challenges. Theimmediate one is to consolidate the nascentrecovery and create jobs. But if Europeaneconomies are to thrive in the next decadethey also need to meet the longstandingproductivity challenge: European businessesare less productive on average than thosein the United States, and this gap had beenwidening for over a decade before therecession took hold.This report provides new evidence on animportant contributor to this productivity gap:the dynamism of Europe’s business landscape.It focuses on a new, purpose-built databaseof business growth in the period from 2002to 2005, drawing on individual records for sixmillion businesses, the result of an internationalcollaboration involving eight Europeancountries, the United States, Canada, and NewZealand.The dearth of European equivalents to Googleor Microsoft, innovative start-ups that growquickly to dominate their markets, has longvexed European policymakers. But the analysisin this report highlights that this is only part ofa wider picture:
•
European countries have on average a lowershare of high-growth rms than the US. Butthey also have fewer medium-growth rmsand fewer shrinking rms. At the same time,Europe has a much larger share of ‘static’rms, that is, rms that neither expand norcontract in a three-year period.
•
The top half of rms grow faster in the USthan in the average European country, whilethe bottom half shrink faster. Thus, the UShas both faster-growing and faster-shrinkingrms, and consequently at the end of theperiod the gap between successful andunsuccessful rms is larger in the US.
•
There is a strong negative correlationbetween the growth rate of rms at the topand the bottom of the growth distribution. Inother words, the faster successful companiesgrow, the faster unsuccessful companies inthe same industry shrink.The lower dynamism of European businesses– both in terms of growth and contraction– should be a concern. It points to lessexperimentation and a slower reallocationof resources from less to more productivebusinesses in Europe, both important driversof productivity growth. The analysis of thedatabase supports this link: a less dynamicbusiness growth distribution is associated withlower productivity growth. Importantly, both ahigher share of growing and shrinking rms arecorrelated with faster productivity growth.This has a number of implications forpolicymakers in Europe. Policies targeted solelyat high-growth businesses, such as improvingthe climate for venture capital, are not ontheir own sufcient to address the lack ofdynamism that hampers Europe’s productivityperformance. They need to be combined withdeeper structural reforms that remove not justbarriers to entry, but also barriers to growthand contraction, such as improving productand labour market regulation, tackling accessto nance, and reducing the European marketfragmentation that stops businesses, especiallyin service industries, operating across borders.Over the coming months, NESTA and itspartners will use this newly developed databaseto examine the specic drivers of businessgrowth, with a view to providing more detailedevidence to support policymakers in tacklingEurope’s growth challenge.
 
3
Acknowledgements
This report was written by Albert Bravo Biosca. The author would like to thank ShanthaShanmugalingam for his contribution in shaping the report. Chiara Criscuolo, Henrik Lynge Hansen,Juan Mateos-Garcia, Yannis Pierrakis, Conor Ryan and Stian Westlake also provided very valuablecomments.The database analysed in this report builds on a joint effort between FORA and NESTA, withsupport from the International Consortium for Entrepreneurship (ICE), and has greatly benetedfrom the work led by Eurostat and the OECD to harmonise business registers across countries.Several people in addition to the author have participated in the long process leading to this newdatabase, including Joseph Alberti, Henrik Lynge Hansen, Rodrigo Lluberas and Glenda Napier.Ditte Petersen and Mark Hart deserve a special mention, for their respective contributions inputting together the manual and the code le that initiated this project.This initiative would not have been possible without the generous collaboration of manyresearchers and statistical agencies in the participating countries that provided the data underlyingthis report, and whom the author would like to thank:
Austria
Werner Hölzl
 Austrian Institute of Economic Research– WIFO
Canada
Sonja Djukic, Chris Johnston and Chris Parsley
Industry Canada, Statistics Canada andIndustry Canada
Denmark
Henrik Lynge Hansen
FORA
Finland
Henri Kahonen, Petri Rouvinen and MikaPajarinen
Ministry of Employment and the Economy,The Research Institute of the Finnish Economy (ETLA) and The Research Institute of theFinnish Economy (ETLA)
Italy
Patrizia Cella and Caterina Viviano
Istituto Nazionale di Statistica (ISTAT)
Netherlands
Rico Konen
Centraal Bureau voor de Statistiek (CBS)
New Zealand
Geoff Mead
 Statistics New Zealand
Norway
Svein Myro and Christian L. Wold Eide
 Statistics Norway and Ministry of Trade andIndustry 
Spain
Valentín Llorente Garcia
Instituto Nacional de Estadística (INE)
United Kingdom
1
Michael Anyadike-Danes, Rodrigo Lluberasand Mark Hart
ERINI, NESTA and Aston Business School
United States
David Brown and Javier Miranda
US Census Bureau
1. This work containsstatistical data from ONSwhich are Crown copyrightand reproduced with thepermission of the controllerof HMSO and Queen’s Printerfor Scotland. The use of theONS statistical data in thiswork does not imply theendorsement of the ONS inrelation to the interpretationor analysis of the statisticaldata. This work uses researchdatasets which may notexactly reproduce NationalStatistics aggregates.

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