New business formation and employment growth: some evidence for the Spanish manufacturing industry

Abstract

This paper explores the effects of new business formation on employment growth in Spanish manufacturing industries. New firms are believed to make an important contribution to economic growth but the extent of this contribution is unclear. We consider time lags of new firm formation as explanatory variables of employment change and identify how long the effect of new firm entries on employment lasts. Our main results show that the effects of new business formation are positive in the short term, negative in the medium term and positive in the long term, thus confirming the existence of indirect supply-side effects found in similar studies for other countries.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Notes

  1. 1.

    Callejón and Segarra (1999) demonstrate that entries contribute positively to the growth of total factor productivity. Fariñas and Ruano (2004) show that incumbent firms are the main contributors to the change in the productivity distribution, while entering firms have lower productivity than incumbent firms. Martín and Jaumandreu (2004) also show that more efficient firms have replaced low productivity firms. Generally speaking, firms that enter the market have higher productivity levels than firms that exit the market. For an overview of the effect of turnover on productivity growth, see Tybout (1996) and Caves (1998). For some empirical evidence in other countries see, among others, Baldwin and Gorecki (1991), Baldwin (1995), Aw, Chen, and Roberts (1997) and Geroski (1989).

  2. 2.

    See, among others, Dunne, Roberts, and Samuelson (1988), Evans (1987), Hall (1987), and Wagner (1994).

  3. 3.

    Most research on the survival of firms shows that the revolving door effect prevails over the displacement effect (Callejón & Segarra, 1999).

  4. 4.

    Segarra and Callejón (2002) and Segarra et al. (2002b) show that the survival patterns of new Spanish manufacturing firms are similar to those of other countries.

  5. 5.

    The interested reader is referred to, for example, Segarra et al. (2002b) and the references therein.

  6. 6.

    The data on establishments include the set-up of several branches by the same firm (the data is at the establishment level). Besides, there is not a minimum size of new establishments to be included.

  7. 7.

    The REI provides information about all new manufacturing establishments while the EI focuses on those firms with more than 10 employees (it also includes firms with less than 10 employees, but only as a sample). See Mompó and Monfort (1989) for further information about the REI.

  8. 8.

    Because of an excess of zero values, data on mineral extraction activities, as well as data on the Spanish region Extremadura, have been excluded. However, these exclusions do not affect the results of the analysis whatsoever.

  9. 9.

    The independent variable, i.e. the GRE, can be measured in three ways. The first way is known as “labour market perspective”, where the number of workers is used to standardize entries. The second way is called the “ecological perspective”, because the number of firms is used to standardize entries. The third way of calculating the entry rate is the “population perspective”, where the population is used to standardize entries. Given that we assume that agents decide to set up a new firm in the labour market where they come from and where they have previous labour experience (Ashcroft, Love, & Malloy, 1991; Johnson, 1983; Kangasharju, 2000; Keeble & Walker, 1994; Storey & Jones, 1987) we have chosen the labour market perspective.

  10. 10.

    Some scholars use the shift-share procedure to obtain a sector-adjusted entry rate (see Ashcroft et al., 1991, for a more detailed explanation).

  11. 11.

    In this model we are interested in the effect of firm entries on the overall level of industrial employment of a region and do not consider each specific sector.

  12. 12.

    We also tried to include a control variable for the business cycle, but it did not fit in the estimation. Besides, the basic results obtained here did not change, and therefore we excluded it.

  13. 13.

    Although we also tried a larger number of lags, we chose to use seven lags because the results are quite similar. However, the efficiency of the estimation decreases as the number of lags increases.

  14. 14.

    For estimation methods of panel data models with two-way error component disturbances, see Baltagi (2001).

  15. 15.

    With regard to this negative effect on the short-term, empirical papers on firm entry suggest that the average size of new firms is smaller than the average size of incumbent firms (the size distribution of new cohorts is more skewed than market structure: see Arauzo and Segarra, 2005, for a detailed analysis of start-up size for the Spanish case). This is why a post-entry size adjustment is very important in manufacturing markets, especially in the first few years when suboptimal size affects a lot of newcomers and selection is very painful.

  16. 16.

    This model is also known as the Almon lag model.

  17. 17.

    At this point we should insist on the fact that we use data from manufacturing industries only, while most of research in this area uses data for the whole economy, including both manufacturing and services activities. Given the specific industry effects, there can be differences between our results and the other contributions based on the whole economy.

  18. 18.

    See Arauzo, Manjón, Martín, and Segarra (2007) for a more detailed analysis on regional determinants of industry dynamics in Spain.

References

  1. Acs, Z. J., & Armington, C. (2004). Employment growth and entrepreneurial activity in cities. Regional Studies, 38, 911–927.

    Article  Google Scholar 

  2. Agarwal, R., & Audretsch, D. (2001). Does entry size matter? The impact of the life cycle and technology on firm survival. The Journal of Industrial Economics, 49(1), 21–43.

    Article  Google Scholar 

  3. Arauzo, J.-M., & Segarra, A. (2005). The determinants of entry are not independent of start-up size: Some evidence from Spanish manufacturing. Review of Industrial Organization, 27, 147–165.

    Article  Google Scholar 

  4. Arauzo, J.-M., Manjón, M. C., Martín, M., & Segarra, A. (2007). Regional and sector-specific determinants of industry dynamics and the displacement effect. Empirica.

  5. Ashcroft, B., Love, J. H., & Malloy, E. (1991). New firm formation in the British counties with special reference to Scotland. Regional Studies, 25(5), 395–409.

    Article  Google Scholar 

  6. Audretsch, D. (1995). Innovation and industry evolution. Cambridge: The MIT Press.

    Google Scholar 

  7. Audretsch, D., & Fritsch, M. (1996). Creative destruction: turbulence and economic growth. In E. Helmstädter & M. Perlman (Eds.), Behavioral norms, technological progress and economic dynamics: Studies in schumpeterian economics (pp. 137–150). Ann Arbor: University of Michigan Press.

    Google Scholar 

  8. Audretsch, D., & Fritsch, M. (2002). Growth regimes over time and space. Regional Studies, 36, 113–124.

    Article  Google Scholar 

  9. Audretsch, D., & Mahmood, T. (1995). New firm survival: New results using a hazard function. Review of Economics and Statistics, 77(1), 97–103.

    Article  Google Scholar 

  10. Audretsch, D., Santarelli, E., & Vivarelli M. (1999). Start-up size and industrial dynamics: Some evidence from Italian manufacturing. International Journal of Industrial Organization, 17, 965–983.

    Article  Google Scholar 

  11. Aw, B. Y., Chen, X., & Roberts, M. J. (1997). Firm-level evidence on productivity growth differentials and turnover in Taiwanese manufacturing. Journal of Development Economics, 66, 51–86.

    Article  Google Scholar 

  12. Baldwin, J. (1995). The dynamics of industrial competition. Cambridge, MA: Cambridge University Press.

    Google Scholar 

  13. Baldwin, J., & Gorecki, P. (1991). Entry and exit and productivity growth. In P. A. Geroski & J. Schwalbach (Eds.), Entry and market contestability: An international comparison. Oxford: Basil Blackwell.

  14. Baltagi, B. H. (2001). Econometric analysis of panel data. Chichester, England: John Wiley & Sons.

  15. Baptista, R., Escária, V., & Madruga, P. (2005). Entrepreneurship, regional development and job creation: The case of Portugal. Discussion papers on entrepreneurship, growth and public policy #0605–2005. Jena: Max Planck Institute for Research into Economic Systems.

  16. Callejón, M., & Segarra, A. (1999). Business dynamics and efficiency in industries and regions: The case of Spain. Small Business Economics, 13, 253–271.

    Article  Google Scholar 

  17. Caves, R. E. (1998). Industrial organization and new findings on the turnover and mobility of firms. Journal of Economic Literature, 36, 1947–1982.

    Google Scholar 

  18. Dunne, P., & Hughes, A. (1994) Age, size, growth and survival: UK companies in the 1980s. Journal of Industrial Economics, 42(2), 115–140.

    Article  Google Scholar 

  19. Dunne, T., Roberts, M., & Samuelson, L. (1988). Patterns of firm entry and exit in U.S. manufacturing industries. Rand Journal of Economics, 19, 495–515.

    Article  Google Scholar 

  20. Evans, D. (1987). The relationship between firm growth, size, and age: Estimates for 100 manufacturing industries. Journal of Industrial Economics, 35, 567–581.

    Article  Google Scholar 

  21. Fariñas, J. C., & Ruano, S. (2004). The dynamics of productivity: A decomposition approach using distribution functions. Small Business Economics, 22, 237–251.

    Article  Google Scholar 

  22. Fölster, S. (2000). Do entrepreneurs create jobs? Small Business Economics, 14, 137–148.

    Article  Google Scholar 

  23. Fritsch, M. (1996). Turbulence and growth in West Germany: A comparison of evidence by regions and industries. Review of Industrial Organisation, 11, 231–251.

    Article  Google Scholar 

  24. Fritsch, M. (1997). New firms and regional employment change. Small Business Economics, 9, 437–448.

    Article  Google Scholar 

  25. Fritsch, M. (2004). Entrepreneurship, entry and performance of new business compared in two growth regimes: East and West Germany. Journal of Evolutionary Economics, 14, 525–542.

    Article  Google Scholar 

  26. Fritsch, M., & Mueller, P. (2004). Effects of new business formation on regional development over time. Regional Studies, 38(8), 961–975.

    Article  Google Scholar 

  27. Fritsch, M., Mueller, P., & Weyh, A. (2005). Direct and indirect effects of new business formation on regional employment. Applied Economics Letters, 12, 545–548.

    Article  Google Scholar 

  28. Geroski, P. (1989). Entry, innovation, and productivity growth. Review of Economics and Statistics, 71, 572–578.

    Article  Google Scholar 

  29. Hall, B. (1987). The relationship between firm size and firm growth in the U.S. manufacturing sector. Journal of Industrial Economics, 35, 583–606.

    Article  Google Scholar 

  30. Johnson, P. S. (1983). New manufacturing firms in the UK regions. Scottish Journal of Political Economy, 30, 75–79.

    Article  Google Scholar 

  31. Kangasharju, A. (2000). Regional variations in firm formation: Panel and cross-section data evidence from Finland. Papers in Regional Science, 79, 355–373.

    Article  Google Scholar 

  32. Keeble, D., & Walker, S. (1994). New firms, small firms and dead firms: Spatial patterns and determinants in the United Kingdom. Regional Studies, 28(4), 411–427.

    Article  Google Scholar 

  33. Martín, A., & Jaumandreu, J. (2004). Entry, exit and productivity growth: Spanish manufacturing during the eighties. Spanish Economic Review, 6, 211–226.

    Article  Google Scholar 

  34. Mata, J., & Portugal, P. (1995). Life duration of new firms. Journal of Industrial Economics, 42(3), 227–245.

    Google Scholar 

  35. Mata, J., & Portugal, P. (1999). Technology intensity, demand conditions, and de longevity of firms. In D. B. Audretsch & A. R. Thurik (Eds.), Innovation, industry evolution and employment (pp. 265–279). Cambridge: Cambridge University Press.

  36. Mompó, A., & Monfort, V. (1989). El Registro Industrial como fuente estadística regional: El caso de la Comunidad Valenciana. Economía Industrial, 268, 129–140.

    Google Scholar 

  37. Reynolds, P., Storey, D., & Westhead, P. (1994). Cross-national comparisons of the variation in new firm formation rates. Regional Studies, 28(4), 443–456.

    Article  Google Scholar 

  38. Segarra, A., Arauzo, J.-M., Manjón, M. C., & Martín, M. (2002a). Demografía industrial y convergencia regional en España. Papeles de Economía Española, 93, 65–78.

    Google Scholar 

  39. Segarra, A. (dir.), Arauzo, J.-M., Gras, N., Manjón, M. C., Mañé, F., Teruel, M., & Theilen, B. (2002b). La creación y la supervivencia de las empresas industrials. Madrid: Editorial Cívitas.

  40. Segarra, A., & Callejón, M. (2002). ‘New firms’ survival and market turbulence: New evidence from Spain. Review of Industrial Organization, 20, 1–14.

    Article  Google Scholar 

  41. Storey, D., & Jones, A. M. (1987). New firm formation–a labour market approach to industrial entry. Scottish Journal of Political Economy, 34, 37–51.

    Article  Google Scholar 

  42. Tybout, J. R. (1996). Heterogeneity and productivity growth: Assessing the evidence. In M. J. Roberts & J. R. Tybout (Eds.), Industrial evolution in developing countries: Micro patterns of turnover, productivity and market structure. New York: Oxford University Press.

    Google Scholar 

  43. Van Stel, A., & Storey, D. (2004). Link between firm births and job creation: Is there a Upas tree effect? Regional Studies, 38, 893–909.

    Article  Google Scholar 

  44. Wagner, J. (1994). The post-entry performance of new small firms in German manufacturing industries. The Journal of Industrial Economics, 42(2), 141–154.

    Article  Google Scholar 

Download references

Acknowledgements

The authors are grateful to the CICYT (SEJ2004-05860/ECON and SEJ2004-07824/ECON). We also would like to acknowledge the helpful and supportive comments of Michael Fritsch, Miguel Manjón, Enrique López Bazo, seminar participants at the “Effects of New Businesses on Economic Development in the Short, Medium and Long Run” Workshop (Max Planck Institute of Economics) and two reviewers. The usual disclaimer applies.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Josep Maria Arauzo Carod.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Arauzo Carod, J.M., Liviano Solís, D. & Martín Bofarull, M. New business formation and employment growth: some evidence for the Spanish manufacturing industry. Small Bus Econ 30, 73–84 (2008). https://doi.org/10.1007/s11187-007-9051-4

Download citation

JEL classifications

  • L00
  • L60
  • R11
  • R12
  • L26

Keywords

  • Regional growth
  • Firm entry
  • Time lags
  • Spanish economy