Distribution and determinants of high-growth firms in Portugal

1. Distribution and determinants of high-growth firms in Portugal International Workshop “High-Growth firms: Local policies and local determinants” 28th March 2012 Copenhagen

2. Introduction Target: Employer Enterprise Population (enterprises with more than one paid worker according the registrars of the Portuguese Social Security System), using the entrepreneurship dataset obtained from Quadros de Pessoal. Methodology: The compilation of this dataset follows the methodology applied byEurostat and OECD (2007) on the classification of what constitutes a High Growth orGazelle firm. Dataset: The derived dataset from the application of this methodology consists of an annual averageof 215,903 active employer enterprises, with an annual average of 36,803 births and 23,743enterprise deaths over the period 1985-2007. In 2007, there were 354.920 employerenterprises employing 3.205.372 workers. • Gazelleenterprises are a subset of High Growth enterprises which consist of employer enterprisesthat during a period of at least 5 years have had an annual average growth in turnover oremployment, respectively, greater than or equal to 20 % per year. • Growth can be measured either by the number of employees or by turnover.

3. Observed factors about firm dynamics in Portugal hazard ratio >1: an increase in the given explanatory variable increases the probability of exit. Entrants and exiters average firm size, by NUTII Survival Table for Employer Enterprise Births by NUTII region, 1987-2005 High turbulence Firm dynamics and performance Decreasing firm average size Hint at size dependence of growth Less survival ability Significant disparities among regions Effect industry growth in survival rates Source: Sarmento and Nunes (2010). Based on: Eurostat, Statistics Portugal for Portugal INE (EIP) data and own calculations based on Quadros de Pessoal GEP, MTSS for Portugal QP (Eurostat/OECD)and SDBS Business Demography Indicators from the OECD (EIP). Notes: Preliminary version of 2005 for Bulgaria, Romania, Portugal and Slovenia. * Employer enterprises according to the Eurostat/OECD methodology, based on Quadros de Pessoal. ** Statistics Portugal data, for enterprises with more than 1 paid employee (employer enterprises). Source: Sarmento, E. de Morais and A. Nunes (2012), “The dynamics of employer enterprise creation in Portugal over the last two decades: a size, regional and sectoral perspective”, NotasEconómicas.

4. High-Growth and Gazelle enterprises (by employment) Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

5. High-Growth and Gazelle enterprises (by turnover) Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

6. Number of employees in high-growth firms according to the employment criteria, by NUTII (1997, 2004 and 2007) Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

7. Number of employees in gazelles according to the employment criteria, by NUTII (1997, 2004 and 2007) Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

8. Share of High-Growth firms in 10+ employees firms (by employment and turnover) Only 9,5% of all Portuguese employer enterprises (with morethan ten employees) have a turnover that is in line with that of High Growth firms. Ifwe consider the growth according to the number of employees instead, then thepercentage of High Growth firms drops to just 3 %. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

9. Share of High-Growth employment in 10+ employees firms (by employment and turnover) Over time, we can observe a narrowing gap between the two measurementcriteria, for both HG and Gazelles. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

10. Average firm size in HG firms and Gazelles and total population of firms, births and deaths The average HG firm size is higher by an average of 18 employees than that of a Gazelle. The growth in average size registered until 1999 was not maintained during the following years. In line with the overall population of firms, HG and Gazelles average size have also decreased from 2000 onwards. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

11. Share of HG firms (by employment) by size class The majority of HG firms and Gazelles are SMEs. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

12. Share of HG and Gazelles (by employment) by NACE There is a shift in the distribution of bothHigh Growth firms over the period of analysis, away from manufacturing (34% in 1995,down to 20% in 2007) to services and commerce (39% in 1995 up to 56% in 2007) as wellas construction (15% in 1995, up to 20% in 2007). A similar pattern is observed for Gazelles. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

13. Distribution of employment: HG and Gazelles (employ) by NUTII regions More than half of HG firms are concentrated around the area of Lisbon and anotherquarter in the North. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

14. Share of HG (employ) in total employment in enterprises +10 employees by NUTII regions The share of employment in HG firms is higher in Lisbon, which was in 2007, more than twice the share of the second most important region, the North. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

15. Share of HG (employ) employment in each NUTII regions 'employment (+10 employees) In 1990, the Algarve had the biggest share of regional employment in HG firms. But the situation reversed and in 2007, with Lisbon leading the regional ranking. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

16. UK comparison 16 Between 2005 and 2008, the UK High Growth firms tripled, on average, thenumber of employees. In Portugal, firms have experienced a sustained decrease inthe number of employees. Furthermore, High Growth firms account for 6% of the totalpopulation of UK firms in terms of employment growth (NESTA, 2009), which is thedouble of what the evidence shows for Portugal. When Portuguese firms are compared with their UK counterparts, it is noticeable that: • onaverage High Growth firms in the UK have been more successful at creating employmentthan the Portuguese • Portuguese High Growth firmstend to display a higher degree of volatility. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

17. UK comparison 17 A significant number of High Growth firms in Portugal operate inthe Construction sector, which has been particularly affected by variations in the business cycle. Source: Own calculations, based on "Quadros de Pessoal", GEP, Ministério do Trabalho e da Solidariedade Social and the OECD/Eurostat´s (2007) methodology.

18. Determinants of HG and Gazelles performance Firm turbulence (excessive creative destruction?) Possible determinants of performance • Short-term factors (business cycle) Sectoral (and not regional) Servicisation of the economy Quality of entrepreneurs Agglomeration effects

19. Share of HG and Gazelles closed during 2000-2009 19 High growth does not grant better survival chances in Portugal. Gazelles seem more prone to dying than HG, showing that rapid growth based on short-run factors does not grant longevity or sustained growth. From the 87% microfirms in BP´s Central de Balanços, only 10 grew into large firms (2000-2009). Source: Bank of Portugal, based on Central de Balanços data and the Eurostat/OECD´s (2007) methodology.

20. Policy assessment Support assessement for HG firms and Gazelles  No targeted support policies: One size fits all (CSF support, financing schemes, venture capital, business angels, incubators) Few policy synergies: Innovation & Internationalization & Entrepreneurship/SME policies. Weak involvement with the regional administration Obstacles and rigidities Access to capital, Labour Market, Regulation, Red tape and Bureaucracy

21. Main (slide) bibliography Bank of Portugal (2010), “Estrutura e dinâmica das sociedades não financeiras em Portugal” Lisbon. Cabral, L. (2007), “Small firms in Portugal: a selective survey of stylized facts, economic analysis and policy implementation”, Portuguese Economic Journal, 6(1), 65-88. Eurostat; OECD (2007), “Eurostat-OECD Manual on Business Demography Statistics”, Paris, OECD Publishing. Instituto Nacional de Estatística [INE] (2009), “O empreendedorismo em Portugal. Indicadores sobre a demografia das empresas 2004-2007”, Destaque INE, Lisboa. NESTA (2009), “The vital 6 per cent, How high-growth innovative businesses generate prosperity and jobs”, Research summary of October 2009. NESTA (2011), “Vital growth: the importance of high-growth business to the recovery”, Research summary, March 2011. Nunes, A. and E. de Morais Sarmento (2012) “Business Demography Dynamics in Portugal: A Non-Parametric Survival Analysis”, in Bonnet, J. et al. (eds.) The Shift to the Entrepreneurial Society: A Built Economy in Education, Sustainability and Regulation, Edward Elgar (Chapter 18). Nunes, A. and E. de Morais Sarmento (2011), “Sobrevivência de empresas – o caso da região Norte de Portugal” in Rui Nuno Baleiras (Coord.), Livro de Casos de Desenvolvimento Regional, Principia. OECD (2008), “Measuring entrepreneurship: A digest of indicators”, OECD-Eurostat Entrepreneurship Indicators Programme, OECD Statistics Directorate. OECD (2009), “Measuring entrepreneurship: a collection of indicators”, 2009 Edition, OECD-Eurostat Entrepreneurship Indicators Programme, OECD Statistics Directorate. Sarmento, E. de Morais and A. Nunes (2012), “Getting smaller: size dynamics of employer enterprises in Portugal” in Bonnet, J. et al. (eds.) The Shift to the Entrepreneurial Society: A Built Economy in Education, Sustainability and Regulation, Edward Elgar. Sarmento, E. de Morais and A. Nunes (2010), “Entrepreneurship performance indicators for active employer enterprises in Portugal”, Temas Económicos nº 9, Ministério da Economia, da Inovação e do Desenvolvimento, Lisboa.