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Entrepreneurship, Job Creation, and Growth in Fast-Growing Firms in Portugal: Is There a Role for Policy?

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Entrepreneurship, Human Capital, and Regional Development

Part of the book series: International Studies in Entrepreneurship ((ISEN,volume 31))

Abstract

Economies that thrive most on their ambitions, innovative and productive firms are due to grow and develop. Our motivation is thus to uncover who are these fast-growing firms and where they operate. These interrogations provide the foundation for an exploration into what are the different choices for policy, and an opportunity to engage afresh with why and if they ought to receive support in the first place, infusing the discussion as to when and how it could be provided and what could the intended results be. We use the dataset Quadros de Pessoal to provide a stronger twofold measurement, according to the employment and turnover growth criteria. We find among Portugal’s distinctive characteristics its high share of SMEs in the population of fast-growing firms, the narrowing down of the difference between measurements according to the employment and turnover criteria and the disproportionate amount of employment generated by the largest segment of fast-growing firms. We find that gazelles are outstanding job creators, having a disproportionately larger impact in job creation than high-growth firms. Accordingly, it is the rapid growth of a few large firms, combined with the entry of a higher number of firms of a higher average size that generates positive net job creation in Portugal. A more thorough understanding of fast-growing firms ought to lead to adjustments in government policies to heighten their exceptional contribution to economic growth. We provide a conceptual framework for tapping into how to design policies for firms which are growing at a faster pace and a roadmap for tackling some of its most controversial issues.

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Notes

  1. 1.

    According to the European definition, (SME’s are considered firms below the 250 employees’ threshold).

  2. 2.

    In Portugal, the estimated median duration of a newborn enterprise lies between 5 and 6 years, which is below that verified in other countries (Nunes and Sarmento 2012).

  3. 3.

    There are, however, other theorizations. For instance, Wennekers and Thurik (1999) put forward an economic development typology based upon new enterprise formation and growth.

  4. 4.

    A growth trigger is a “systematic change to the structure and workings of a firm which provides a critical opportunity for altering that firm’s growth trajectory” (Brown and Mawson 2013).

  5. 5.

    In this chapter, we shall use the term “fast growing” firm to include both “high-growth” and “gazelle” enterprises.

  6. 6.

    A minimum of 20 % growth a year for 3 consecutive years represents a minimum of 72.8 % growth over 3 years ((1.2 × 1.2 × 1.2)−1 = 0.728). According to this methodology, a firm which might have grown 72.8 % (either in turnover or in employment) within a single year with no growth in the following two does not qualify as high-growth.

  7. 7.

    Settling the period over which growth is measured is determinant for defining what makes a high-growth firm. If the measurement period is too short (e.g., a year), firms with short-term contracts or seasonal employees might be classified as such even though their employment growth is temporary. Also, firms can live short lives and die before the start of the new measurement period, thus not being accounted for. Conversely, the period for defining high-growth firms should be long enough such that changes of a transitory nature are not erroneously accounted for as high growth. The OECD definition thus recommends a 3-year growth threshold.

  8. 8.

    In 2007, more than 81 % of Portuguese employer enterprises had fewer than ten employees. The OECD definition thus excludes an average of approximately 175,512 firms (of a total of 215,905 firms) with fewer than ten employees from being classified as high-growth firms over the period.

  9. 9.

    Some authors have pointed out that growth is first consummated in terms of turnover and only later on feeds into employment. From the visible fluctuations of our data, we have no account of that phenomenon, but it is an issue worth looking at in subsequent work.

  10. 10.

    Please refer for instance to Sarmento and Nunes (2010c) for more information.

  11. 11.

    This means that if a firm which started with the minimum required of ten employees and has to grow a minimum of 20 % during the following 3 years, it has to recruit at least two extra workers in the first year, 2.4 in the second and 2.88 in the third, ending up with a minimum required of around 17 workers at the end of the 3-year period.

  12. 12.

    Caution must be employed when interpreting these results, as this might also be due substantially to the fact that a considerable amount of firms’ headquarters are located in the Lisbon area and that we are using enterprise and not establishment data.

  13. 13.

    The turnover definition tends to heighten the manufacturing sector.

  14. 14.

    During this period, high-growth firms and gazelles have been emerging considerably more in service and commerce sectors. According to the employment criteria, we observed a clear shift in the distribution of high-growth firms away from manufacturing (34 % in 1995, down to 20 % in 2007) to services and commerce (49 % in 1995 up to 56 % in 2007), as well as construction (15 % in 1995, up to 20 % in 2007). A similar pattern is observed for gazelles, although the drop in manufacturing sector is higher, it falls sharply by over a half in 13 years (42 % in 1995 to 20 % in 2007). A significant number of high-growth firms in Portugal operated in the construction sector, which was particularly hit by variations in the business cycle. This sectoral rebalancing reflects trends already perceived in the overall population of employer enterprises (Sarmento and Nunes 2010b, c).

  15. 15.

    The challenge arises from the number of firms being a stock variable, measured at a single point in time whilst job creation, as a flow is measured between two different points in time. Consequently, this relationship also depends on the length of the measurement period.

  16. 16.

    In the case of the present data, it refers to employees in employer enterprises in the size-class of over ten employees.

  17. 17.

    As absolute contributions are the product of net job creation rates and the share that a category occupies in total employment.

  18. 18.

    More static analysis account for net job creation as the difference between job gains and job losses in any given year.

  19. 19.

    Business cycles could explain part of the dynamism of European firms (Biosca 2010).

  20. 20.

    The pool of high-growth firms contain on average older firms than the pool of gazelles. This is also verified for Portugal using another information source applying a similar methodology (Informa D&B 2011). Stylized facts of firm dynamics also indicate that established firms, are on average, of a bigger size than new entrants.

  21. 21.

    High-growth average firm size is larger than that of gazelles’ throughout the period.

  22. 22.

    We cannot fully evaluate size vis-à-vis with age, as the methodology we employ restricts the analysis to firms with over ten employees. This excludes 20–30 % of Portuguese employer enterprises from the analysis.

  23. 23.

    This can be due to data paucity, data quality constrains, and a variety of methodological issues, amongst which diversity of measurements which can disregard gross job flows in favor of a narrower emphasis on net job contribution and regression-to-the-mean effects (Haltiwanger and Krizan 1999).

  24. 24.

    The Gazelle growth program, for instance, assists the best Danish growth companies to expand to international markets. For Finland, consider the VIGO programme Lilischkis (2013) and for Sweden Bornefalk and Du Rietz (2009). For France, see Betbèze and Saint-Étienne (2006), for Germany consider the IMProve project, for instance. For Scotland consider Brown and Mawson (2013) and for Canada, Herman and Williams (2013). For the United States, consider the initiative Start-up America and for New Zealand see Ministry of Business, Innovation and Employment (2013) and New Zealand Government (2013).

  25. 25.

    From the 87 % of Portuguese micro-firms existing between 1991 and 2009 in the Bank of Portugal’s Central de Balanços database, only ten grew into large firms (Banco de Portugal 2010).

  26. 26.

    Stam et al. (2012) labels an “ambitious entrepreneur” as someone who engages in the entrepreneurial process with the aspiration to create as much value as possible. Schoar (2010) contends that only a small percentage of entrepreneurs are likely to succeed in scaling-up their businesses towards increasing profits and creating jobs, putting forward a distinction between “subsistence” and “transformational” entrepreneurs.

  27. 27.

    In France, medium-sized enterprises have for long been recognized as the engines of growth (e.g., GE Capital 2013; KPMG 2013 and 2012; KPMG and CGPME 2012) and the Government has tailored specific initiatives in support of these enterprises (Ernst and Young 2013).

  28. 28.

    Since 2011, it has been replaced by the Conselho Estratégico de Internacionalização da Economia or CEIE.

  29. 29.

    This is particularly important for gazelles, as its growth tends to be highly concentrated over a short period of time.

  30. 30.

    The aim and focus of the intervention also influences the choices of targets made later on, and the former also influences subsequently the type of resource allocation. Traditional SME focused policies are mostly supported by public funds, with a little support going to many agents, thus privileging quantity instead of quality. Focusing on fast-growing firms entails a somehow different focus, on quality and on the allocation of relatively more funds to a fewer number of firms, possibly through a mix of public and private funding.

  31. 31.

    This has also been the principle applied by the European Union, where policies designed at the supranational level can be left to be adapted regionally, making use of the principle of subsidiarity.

  32. 32.

    The European Investment Bank (2005) has conducted an evaluation on SME loans in the enlarged European Union and the World Bank (Acevedo and Tan 2011) on SMEs programs in Latin America and the Caribbean.

  33. 33.

    An analysis of Swedish firms suggests that the strict application of the Eurostat/OECD definition excluded about 95 % of all surviving firms, creating 39 % of all new jobs during the period (Daunfeldt et al. 2012).

  34. 34.

    Consider, for instance, Felício et al. (2012) and Câmara de Comércio Americana em Portugal (2012).

  35. 35.

    In France, medium-sized enterprises have for long been recognized as the engines of growth (e.g., GE Capital 2013; KPMG 2012, 2013; KPMG and CGPME 2012) and the Government has tailored specific initiatives in support of these enterprises (Ernst and Young 2013).

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Acknowledgment

The authors would like to thank Gabinete de Estratégia e Planeamento of the Portuguese Ministry of Labor and Social Security for the provision of the data.

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Authors and Affiliations

  1. African Development Bank, Tunis-Belvedère, Tunisia

    Elsa de Morais Sarmento

  2. Universidade de Aveiro, Aveiro, Portugal

    Elsa de Morais Sarmento

  3. GEMF—Grupo de Estudos Monetários e Financeiros, Faculdade de Economia da Universidade de Coimbra, Coimbra, Portugal

    Alcina Nunes

  4. Instituto Politécnico de Bragança, Bragança, Portugal

    Alcina Nunes

Authors
  1. Elsa de Morais Sarmento
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  2. Alcina Nunes
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Corresponding author

Correspondence to Elsa de Morais Sarmento .

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Editors and Affiliations

  1. International Entrepreneurship, CEG-IST, Universidade de Lisboa, Portugal, and Brunel Business School, Brunel University, Uxbridge, Middlesex, United Kingdom

    Rui Baptista

  2. Department of Management and Economics, School of Social and Human Sciences and The Centre for Management Studies of Instituto Superior Técnico (CEG-IST), University of Beira Interior and University of Lisbon, Covilhã, Portugal

    João Leitão

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de Morais Sarmento, E., Nunes, A. (2015). Entrepreneurship, Job Creation, and Growth in Fast-Growing Firms in Portugal: Is There a Role for Policy?. In: Baptista, R., Leitão, J. (eds) Entrepreneurship, Human Capital, and Regional Development. International Studies in Entrepreneurship, vol 31. Springer, Cham. https://doi.org/10.1007/978-3-319-12871-9_17

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