Academic journal article The European Journal of Comparative Economics

Firm Entry and Aggregate Efficiency Growth: An Optimal Dynamic: Program of Entry and R&D Investment

Academic journal article The European Journal of Comparative Economics

Firm Entry and Aggregate Efficiency Growth: An Optimal Dynamic: Program of Entry and R&D Investment

Article excerpt

1. Introduction:

On the empirical level, the issue of the relative contribution of firms entry to aggregate productivity growth is still an object of controversies. Indeed, this contribution varies from one study to another, depending on the measurement of aggregate productivity, the time horizon over which changes occur, the business cycle, as well as on the country or industry under investigation. For example, Baily et al. (1992) and Griliches and Regev (1995), found that firm entry and exit had a small contribution to aggregate productivity growth for US manufacturing and Israeli industries respectively. According to Foster et al. (1998), the contribution of net entry to aggregate growth depends on the horizon over which the changes are measured. When high frequency data are used, the contribution of entry and exit to productivity growth is low, but with intermediate (a 5-year time horizon) or long run (a 10-year time horizon) data, the contribution of net entry is large. Martin and Jaumandreu (2004) find that entry has a positive and significant effect on Spanish aggregate productivity growth with a stronger impact in the period before Spanish integration in the EU. Scarpetta et al. (2002) analysed several OECD countries and found that the entry and exit contributed to between 20% to 40% of aggregate productivity growth. There were significant differences in the contributions of entry to aggregate productivity growth between Europe and the US. In the former, the entry of firms has a positive contribution to growth, but the effect is small, whereas in the latter, firm entry has a negative contribution to growth. Differences were also found in terms of the importance of the contribution to aggregate productivity growth across manufacturing sectors. In high technology sectors, the entry of new firms has a larger than average contribution to total growth. The results also differ according to whether aggregate productivity is measured by TFP or labour productivity, with a net entry having a strong contribution to TFP growth. Brandt (2004), using a new data set covering nine EU countries suggests that high rates of firm entry coincide with rapid productivity, especially in the ICT related services sectors and in some business services industries, while in the more mature manufacturing industries, expenditure on formal R&D seems to be more important as a determinant of productivity growth. According to Baldwin and Wulong (2006), firm entry explains 70 % of the aggregate labour productivity growth of the Canadian manufacturing sector over the period 1979-1999. Both Toshiyuki and Kazuyuki (2005) and ITO Keiko (2011), using Japanese firm-level data respectively over the periods 1992-2002 and 2000-2007, found that the entry tends to be negatively associated with the productivity growth both in the manufacturing and the service sectors.

It comes out from these empirical divergences that the effects of entry liberalizing policies are still unresolved too. Indeed, Srivastava (1996) shows that the rate of TFP growth increased after deregulation in India in 1985. However, more recently, Aghion, Burgess, Redding and Zilibotti (2005), provide evidence that deregulating entry in India in 1985 and 1991 has had an ambiguous effect. Nicoletti and Scarpetta (2003) and Alesina et al. (2003) found a negative effect of regulation reforms on productivity growth in OECD countries. This result is confirmed in Brandt (2004) for European Union. However, Griffith and Harrison (2004) show different impacts of entry liberalization on economic rent, R&D and growth rates of labour productivity and of TFP in the European Union over the period 1985-2000 as well as separately for the manufacturing and services sectors. The results obtained by Cincera and Galgau (2005), using 352 digits sectors for 9 OECD countries suggest that the coefficient on regulation is allowed to differ across sectors with the sign and significance varying across sectors and countries. …

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