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High growth firms and trade linkages: Imports do matter

Abstract

This paper examines the association between high-growth firm status and global linkages with special focus on the role of imports. We rely on a rich panel data covering all formal firms in Tunisia between 1999 and 2015. Our results show that firms that import, export, have foreigner ownership, or benefit from offshore regimes are more likely to achieve high-growth status compared to other similar firms in terms of size, age, sector, and region. Among these channels, importing status has a robust positive association with high growth. We find that an increase in the import barriers led by changes in non-tariff measures reduces the likelihood of achieving high-growth status through import channel for firms that are in sectors facing relatively higher levels of exposure to the shock.

Plain English Summary

Import is an important attribute of high-growth firms. Those are firms that achieve outstanding growth performance in terms of turnover or number of workers. They are more prevalent among small and young firms and are an important driver of job creation. This paper uses a very comprehensive data from Tunisia to analyze the relationship between trade and high-growth firm status. Our results show that firms more exposed to external linkages through importing, exporting, or foreigner ownership are more likely to achieve high growth. More specifically, we find that increasing import barriers negatively affect the prevalence of high growth firms. Imports are widely affected by policy decisions through tariff and non-tariff measures. These results imply that facilitating access to import should be a relevant component when designing and implementing policies aiming to support firms with high-growth potential.

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Fig. 1

Notes

  1. 1.

    For example, if 1000 small firms, with 10 employees each, manage to grow 20% per year over 10 years, their number of jobs would increase from 10,000 to almost 62,000 over this period.

  2. 2.

    Coad and Srhoj (2020) use comprehensive datasets on Croatian and Slovenian firms and highlight that predicting HGF status based on observable characteristics of the firm is a significant challenge. Lopez-Garcia and Puente (2012) use a dynamic probit analysis with firms from Spain and find that human capital factors and access to credit are important to high-growth episodes. Audretsch (2012) summarizes the discussion on key determinants of HGF highlighting the importance of several factors, including managerial skills, access to finance, market orientation, human capital, and geographic clusters.

  3. 3.

    We use lag information starting in 1996 to calculate HGF status, which require 3 years of existence.

  4. 4.

    We assess the robustness of the results in the empirical analysis (section 5) by following the OECD definition FOR HGF and imposition the constraints towards firms with 10 or more employees. Section 1 of the appendix provides a short summary on other HGF definitions available and used in the literature.

  5. 5.

    The OECD report Entrepreneurship at a Glance (OECD 2017) has been publishing several indicators of HGF annually, but mostly concentrated on OECD countries.

  6. 6.

    Addition information on the RNE is presented in Rijkers et al. (2014).

  7. 7.

    We use data from previous years, up to 1996, to calculate the HGF indicators for 1999 and identify the entry rate information, starting in 1997.

  8. 8.

    This pattern is very common across the 2000–2014 period. The year 2015 is very atypical regarding the share of young firms in total number of jobs, as described in the Appendix.

  9. 9.

    Following Woodridge (2002, p. 455), “the LPM often seems to give good estimates of the partial effects on the response probability near the center of the distribution of X. If the main purpose is to estimate the partial effect of Xj on the response probability, averaged across the distribution of x, then the fact that some predicted values are outside the unit interval may not be very important.”

  10. 10.

    The HGF status is calculated based on the definitions previously described over 3-year growth rate average.

  11. 11.

    This estimation assumes a linear relationship regarding exporting and importing statuses. It means that the marginal estimates associated with becoming an exporter (importer) or exporting (importing) an additional year with high-growth status are constant.

  12. 12.

    Results are available under request.

  13. 13.

    Foreign and Offshore statuses are also negative, but not significant. Yet, these variables have low variation within-firm, given that a very small share of firms change their FDI or offshore status over time.

  14. 14.

    For example, Clayton et al. (2013) and Daunfeldt et al. (2014) find that at least 75% of firms in the US private sector and 95% of surviving firms in Sweden, respectively, are smaller than 10 employees.

  15. 15.

    Another option suggested by Clayton et al. (2013) classifies a firm with fewer than 10 employees as an HGF if it made a growth of 8 or more employees over a 3-year period.

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Acknowledgements

The authors are grateful for the helpful comments received from the editor, the two anonymous referees, Denis Medvedev, participants of the HGF report authors’ seminar, and participants of the Economics Research Seminar Series at the American University in Cairo. The authors are also thankful to the Tunisian National Institute of Statistics for generously hosting them during this research. Leila Baghdadi acknowledges the support of the WTO Chair at ESSECT Université de Tunis.

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Correspondence to Marcio Cruz.

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The analysis for this paper was originally produced as background material for the World Bank Group’s report High-Growth Firms: Facts, Fiction, and Policy Options for Emerging Economies (Grover et al. 2019).

Appendices

Appendix 1. HGF definition

Since the seminal contributions of Birch and Medoff (1994) and Birch et al. (1995), the literature has defined HGF in many different ways. Most of these studies tend to agree on using turnover or number of employees to measure growth (see for instance Autio et al. 2000, Secchi 2006, Goedhuys and Sleuwaegen 2010, Capasso et al. 2013, Holzl 2014, Daunfeldt et al. 2014, and Secchi 2006, Haltiwanger et al. 2017). The growth measures using turnover or number of employees are the most available in enterprise surveys worldwide, which make it possible to compare HGFs across countries. We can classify these approaches in two groups: (i) absolute percentage growth (with fixed growth rate or fixed share of top performing firms); (ii) combined growth and initial size measures.

A well-known HGF definition in the first group is provided by OECD (2007). It defines HGF as all enterprises with average annualized growth greater than 20% per annum, over a 3-year period, measured by the number of employees or turnover. Moreover, this definition uses a 10-employee minimum threshold to eliminate firms with a small number of jobs, for which a small change (e.g., 1 job) can lead to high growth rates. This threshold is contested in some circumstances because it can significantly influence the number of HGFs in the dataset.Footnote 14 An advantage of this measure is that it does not impose a limit for the share of top performing firms, which can vary with business cycles. A disadvantage is that the growth rate per se does not take into consideration the differences in initial size, nor relative average differences across countries.

An alternative to the OECD approach is a definition based exclusively on a fixed share of top performing firms, such as the top 1%, 5%, or 10% of highest growing firms in the period. Several studies adopted this measure (Goedhuys and Sleuwaegen 2010, Holzl and Friesenbichler 2010, Lopez-Garcia and Puente 2012, Bjuggren et al. 2013, Capasso et al. 2013, Coad et al. 2014, Secchi 2006, and Daunfeldt et al. 2014). This definition is also based exclusively on the growth rate of the firms but keeps the share of HGFs constant. A drawback of these definitions is that, in case there is an unexpected event where all firms have low growth, it still identifies the top percentile of firms as HGF. The Birch index (Birch 1979) is likely the most well-known HGF definition in the second group, which also considers the initial size of the firm.

Another index, following the aim of controlling for differences in the initial size of firms is provided by Davis, Haltiwanger, and Schuh (1996). This index measures the growth rate of the firm relative to the average size. HGF definitions based on this method also select a given share of firms in the top percentile of the index distribution.Footnote 15

Appendix 2 Dynamics of HGF over time in Tunisia

Table A1 Dynamics of HGF in Tunisia

Appendix 3 Sectoral exposure to NTM shock

Fig. A1
figure2

Exposure to import in 2000 based on the average percentile of imports by products imported by firms in each sector

Fig. A2
figure3

Share of products facing an increase in NTM barriers based on products imported by a given sector in 2000

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Cruz, M., Baghdadi, L. & Arouri, H. High growth firms and trade linkages: Imports do matter. Small Bus Econ (2021). https://doi.org/10.1007/s11187-021-00538-w

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Keywords

  • High-growth Firms
  • Entrepreneurship
  • Tunisia
  • Trade
  • Imports

JEL Classifications

  • D22
  • F14
  • L26