New detailed firm-level datasets reveal an enormous amount of heterogeneity across firms in terms of their growth and survival. While startups and young firms are, on average, the engines of aggregate job creation and productivity growth, only about half of all startups survive for more than five years and most of those that continue to operate are small and do not create jobs or innovate. Therefore, the documented growth prowess of young firms rests on the shoulders of a small fraction of high-growth firms, so called “gazelles”.
However, while the role of firm heterogeneity for macroeconomic dynamics has attracted academic interest in recent years, we still know relatively little about either the sources of differences between firm growth and survival patterns or about the implications this heterogeneity has for the macroeconomy.
Petr Sedláček has been awarded a Starting Grant of the European Research Council with the objective of expanding our understanding of the origins of firm growth and its implications for macroeconomic dynamics.
The research program is sectioned into two broad blocks. The first, largely empirical, block will use detailed firm-level data from Germany, the U.K. and the U.S. to estimate the extent to which firm growth and survival are predictable from the time of startup. Preliminary results for the U.S. economy suggest that differences across firms are indeed to a large extent driven by factors present already at startup. Next, using micro-data from Portugal, Petr will analyze how this predictability of firms’ growth and survival is related to observable characteristics of their founders with a particular focus on their past employment history and whether or not they have owned a business before (so called “serial entrepreneurship”).
The second block of the research agenda then aims to understand theoretically and quantitatively how choices of heterogeneous entrepreneurs, firm dynamics and the macroeconomy are jointly interconnected. The focus on the interaction between firm and founder heterogeneity, and their role in shaping macroeconomic performance, is largely missing from current research. However, without this link we cannot study several key questions brought up in current policy debates. For instance, how can the endogenous nexus of entrepreneurs, firm dynamics and the macroeconomy help us understand the observed rise in income and wealth inequality and what macroeconomic consequences does this development entail. Or what policies would enable European countries to promote the founding of high-growth firms, which are less plentiful compared to the U.S. economy, and what impact would such policies have on the well-being of non-entrepreneurs?
A research project supported by the European Research Council
ERC-2018-STG - 802145