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

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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?

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Background and Motivation (cont.)

• International comparisons of business dynamics
  require comparable statistics on
• Firm entry and exit
• Firm growth

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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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Overview

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

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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.

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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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Data
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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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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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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.

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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.