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Firm Growth, Institutions and Structural Transformation

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  • Henrekson, Magnus

    ()
    (Research Institute of Industrial Economics (IFN))

  • Johansson, Dan

    ()
    (Ratio)

Abstract

This essay argues that the economic contribution of certain firms – be they small, young or rapidly growing – has to be understood in a broader context of creative destruction. Growth of some firms requires contraction and exit of some other firms to free up resources that can be reallocated to expanding firms. Entry and expansion are flip sides to exit and contraction and the process through which the factors of production are put into different use defines structural transformation. We analyze institutions and policies conducive to structural transformation, in particular the expansion of high-growth firms (HGFs), since they have empirically been shown to contribute disproportionately to economic development. Firm growth is viewed as resulting from the continuous discovery and use of productive knowledge. Rapid firm growth requires a set of economic actors with complementary competencies that work together to identify and commercialize novel business ideas. The institutional framework determines the incentives for these individuals to acquire and utilize knowledge. We identify a number of institutions that encourage the creation of HGFs and promote structural transformation. In particular, our analysis points to the key roles played by tax structures, labor market regulation, and the contestability of service markets. Even in advanced economies, there is a large untapped economic potential which can be unleashed by institutional changes, such as the opening up of closed markets for entrepreneurial competition. However, there is no “quick-fix” that will boost the frequency of HGFs and structural transformation. Our analysis suggests that policymakers need to adopt a broad approach and implement a wide array of complementary institutional reforms to increase the prevalence of HGFs and to facilitate structural transformation.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 820.

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Length: 60 pages
Date of creation: 07 Jan 2010
Date of revision:
Publication status: Published in Handbook of Research on Entrepreneurship and Regional Development, Fritsch, Michael (eds.), 2011, chapter 7, pages 175-214, Cheltenham, UK and Northampton, MA: Edward Elgar.
Handle: RePEc:hhs:iuiwop:0820

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Keywords: Entrepreneurship; Firm growth; Gazelles; High-growth firms; High-impact firms; Institutions; Job creation; Rapidly growing firms;

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Cited by:
  1. Fritsch, Michael, 2013. "New Business Formation and Regional Development: A Survey and Assessment of the Evidence," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 9(3), pages 249-364, February.
  2. Coad, Alex & Daunfeldt, Sven-Olov & Johansson, Dan & Wennberg, Karl, 2011. "Who do High-growth Firms Employ, and Who do they Hire?," Ratio Working Papers, The Ratio Institute 169, The Ratio Institute.
  3. Crespo Cuaresma, Jesus & Oberhofer, Harald & Vincelette, Gallina A., 2014. "Institutional Barriers and Job Creation in Central and Eastern Europe," Working Papers in Economics and Finance 2014-1, University of Salzburg.

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