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.
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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).
Most research on the survival of firms shows that the revolving door effect prevails over the displacement effect (Callejón & Segarra, 1999).
The interested reader is referred to, for example, Segarra et al. (2002b) and the references therein.
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.
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.
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.
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.
Some scholars use the shift-share procedure to obtain a sector-adjusted entry rate (see Ashcroft et al., 1991, for a more detailed explanation).
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.
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.
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.
For estimation methods of panel data models with two-way error component disturbances, see Baltagi (2001).
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.
This model is also known as the Almon lag model.
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.
See Arauzo, Manjón, Martín, and Segarra (2007) for a more detailed analysis on regional determinants of industry dynamics in Spain.
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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.
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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
- Regional growth
- Firm entry
- Time lags
- Spanish economy