Alexandra Tsvetkova (p), Nicolaos Terzidis

Orsa Kekezi

The strong and positive link between business dynamism and productivity is well-documented in both theoretical and empirical literature focusing on industries or firms. For example, Foster, Haltiwanger and Krizan (2001[93]) estimate that during the 1977-87, net entry accounted for 25% of productivity growth in the U.S. manufacturing. Asturias, Hur, Kehoe and Ruhl (2019[97]) come to a comparable conclusion using manufacturing data for South Korea and Chile. Business entry enhances productivity via several channels. Start-ups tend to bring new technologies and production processes to market driving up the overall efficiency of the economy (if start-ups are more efficient than incumbents). If new firms are indeed more efficient and market reallocates resources to such companies, overall efficiency will increase due to an expanding market share of more efficient firms. Besides, entry (and a threat of entry and exit) imposes competitive pressure that forces incumbents to become more innovative (Aghion et al., 2005[99]) and to improve their business processes and production practices (Nickell, 1996[100]).
The link between business dynamism and productivity at the regional level is less well-understood. Many of the mechanisms postulated in the industry-level literature would apply only to non-tradable sector, where regional competition effects are more likely to be present. In less dynamic places, for example in rural areas, business entry might be predominantly of the necessity type and in lower productivity industries such as services, driving down overall productivity performance of a region.
This paper fills this gap by studying the link between business dynamism and productivity in European regions. Preliminary results point to the negative effect on average but results differ by sector with possible inter-sectoral spillover effects.

Alexandra Rusu (p), Alexander Lembcke, Benoit Dicharry, Konstantina Boutsioukou

Rune Dahl Fitjar

This paper aims to understand how the quality of institutions relates to firm performance at the subnational (regional) level, in the OECD and selected non-OECD countries. By combining data on regional institutional quality (from corruption to quality of public services to political instability) and relating it to various measures of firm performance (employment, productivity, business dynamics), the paper aims to go beyond the dictum that (regional) institutions matter and provide a more detailed understanding of which institutions matter and why.

The study modifies a standard framework in the literature (Williamson, 2000[1]) to categorise institutions not only by their timescale (fast, medium and slow moving), but also by their relevance at the regional level. It then proceeds to identify both the direct effect of the various types of institutions on firm performance and the indirect effects, by exploring channels such as innovation (as measured by patents, product and process innovation).

Preliminary findings suggest a positive relationship between stronger institutions, employment and labour productivity. Weaker institutions are associated with more business dynamics, especially business death rates, as well as smaller firms and a lower density of active firms. Conversely, there is preliminary evidence of a positive relationship between weaker institutions and the business survival rate.

Fast and slow moving institutions exhibit stronger correlations with business dynamics, while medium and slow moving institutions play a more important role for economic value creation. The analysis provides evidence that innovation is an important channel through which higher-quality institutions contribute to improved productivity, employment and overall economic activity.

Wessel Vermeulen (p)

Mark Partridge

see extended abstract