Alternative Measures of Business Entry and Exit

1. Alternative Measures of Business Entry and Exit By Ron Jarmin, Javier Miranda, and Kristin Sandusky September 16, 2003

2. Background Motivation • Business entry and exit, or churning, in market based economies is a fundamental process in innovation, productivity growth and improved economic performance. • Can differences in business dynamics help explain differences in the performance of European and US Economies? • Observe differences in employment growth, business entry and exit. • The role of policy and institutions?

3. Background and Motivation (cont.) • International comparisons of business dynamics require comparable statistics on • Firm entry and exit • Firm growth

4. Measurement Issues • Theoretical notions of entry, growth and exit refer to firms operating within markets. • Most empirical analyses utilize data that do not permit the accurate delineation of markets or the tracking of firms across markets. • This is especially the case for analyses done from business register based data. • We examine the sensitivity of statistics on business dynamics to alternative “market” definitions

5. Overview • Data • LBD • Establishment, Firm, Firm-Geography • Turnover (entry plus exit) rates • Entry Size • Post Entry Growth • Conclusions

6. Data • The Longitudinal Business Database (LBD) is an establishment level dataset with • firm (enterprise) ownership information • detailed geographic information • detailed industry information • firm size information. • Available years: 1975 to 2000 (updated annually) • Coverage: All U.S. business establishments in the U.S. and outlying areas with employees.

7. Measures • Turnover (Entry rate + Exit Rate) • Entry Size • Post Entry Growth • Computed for: • Firms • Establishments • Firms defined by the State boundaries

8. Data

12. Key Facts About Turnover • Unweighted turnover rates are not sensitive to market definition • Measures of turnover weighted by employment are • Entry and exit of firms across states lead to turnover rates that are approximately 20% higher. • Job turnover rates are sensitive to definition • approximately 10% higher when we identify firms at the state versus the nation.

14. Key Facts about Firm Size at Entry • Entry size is sensitive to choice of geographic market. • Size effect, while not big, persists in successive entry cohorts. • Measuring firms within smaller markets (e.g. States) leads to overestimates of entry size statistics.

16. Key Facts about Post Entry Growth • The expansion of operations into neighboring states is a significant contributor to firm growth. • about 1/3rd of total firm growth experienced by the 1977 cohort is due to firms branching into neighboring states. • Limiting firm growth to smaller “local” markets, such as a state, results in a significant underestimation of post entry firm growth.

17. Conclusions • Measures of producer dynamics are sensitive to the definition of the "markets" firm operate in.We find significant impacts on several key statistics: • Job Turnover, Entry size and post entry growth. • Turnover rates and the size of entrants for European countries might be smaller, and post entry growth larger, if one could track firms operating several countries. • Calls for caution when comparing such statistics between the U.S. and European countries.