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Small firms in Portugal: a selective survey of stylized facts, economic analysis, and policy implications

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Abstract

I survey a number of stylized facts pertaining to the dynamics of firm entry, growth, and exit in competitive industries. I focus particularly on data for Portugal, although I also consider, for comparison purposes, data from other countries. I then present a series of theoretical models that attempt to explain the stylized facts and evaluate the welfare impact of market distortions. Finally, I derive a number of policy implications, all centered around the notion of economic mobility.

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Notes

  1. See, for example, Tirole (1988).

  2. See Cabral (2005) for a discussion of this point.

  3. See Gibrat (1931) and Sutton (1997).

  4. See Angelini and Generale (2005; Barrios et al. (2005; Lotti and Santarelli (2004). However, Fagiolo and Luzzi (2004) fail to detect such evolution in the skewness of the firm size distribution.

  5. Pedro Conceição (personal communication).

  6. The line corresponds to the regression of the share of the informal economy with respect to GNI per capita. The regression has an R 2 of 0.49; the GNI per capita coefficient has a p value of 1.4E−06.

  7. See Djankov et al. (2002) for various notes on this dataset. Note that there are some discrepancies between Tables 7 and 8 regarding the data for Portugal. First, the values of GDP per capita are different; however, one must consider that the value is measured for different years and in different units. Second, the time to start a business is lower in Table 8; but here, the measure is in business days, not calendar days, so the difference is not that great.

  8. The lines in each figure are the estimated value from regressing the vertical-axis variable on the horizontal-axis variable. The values of R 2 are 30 and 10%, respectively; the coefficients relating the two variables in each graph have p values of 0.003 and 0.000, respectively.

  9. See Conway et al. (2003).

  10. This tendency is marginally more pronounced in the component “state control.”

  11. In 2003, the standard deviation of the product market regulations (PMR) and BTE indices was 0.43 and 0.42, respectively, so the differences 0.1 and 0.2 are economically and statistically small.

  12. It may be worth to point out that the competitive selection model does not depend on firms being asymmetric with respect to costs. We could alternatively assume that some firms’ products are better than others’.

  13. Ericson and Pakes (1995) also consider the possibility of non-competitive behavior by firms.

  14. Pakes and Ericson (1998) test the relative importance of these two sources of heterogeneity. They show that firm type is ergodic in manufacturing but not in services. This is consistent with the interpretation that Jovanovic’s (1982) story does a better story at explaining the dynamics of firms in the services sector, whereas Ericson and Pakes (1995) is a better model of firms in manufacturing.

  15. The model can easily be extended to firms with different capacities; simply assume that some firms have multiple establishments, each consisting of one of the “firms” that I consider.

  16. See Ahn (2001) for a survey.

  17. This is, in essence, the point of Harberger’s (1954) estimate of the social cost from monopoly: If the distortion is small, then the welfare loss is of second order.

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Acknowledgements

I am grateful to Alberto Castro, José Mata, and two referees for their comments.

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Authors and Affiliations

  1. New York University, New York, NY, USA

    Luís M. B. Cabral

  2. CEPR, London, UK

    Luís M. B. Cabral

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Correspondence to Luís M. B. Cabral.

Additional information

This paper was prepared for presentation at the 2006 Banco de Portugal Conference, Desenvolvimento Económico no Espaço Europeu.

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Cabral, L.M.B. Small firms in Portugal: a selective survey of stylized facts, economic analysis, and policy implications. Port. Econ. J. 6, 65–88 (2007). https://doi.org/10.1007/s10258-007-0018-9

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