What drives the dynamics of business growth?

Notwithstanding the growing body of evidence documenting the persistent differences in the dynamism of economies, our understanding of their drivers is still rather limited. This paper contributes to closing this gap, shedding light on the role played by labour regulation and financial development in shaping the distribution of firm growth. Using unique harmonised micro-aggregated data for eleven countries, we look beyond differences in average growth rates and examine the impact that institutional factors have across the distribution of firms, showing that improvements in a country's institutional framework create both winners and losers, even when the economy as a whole benefits. Specifically, our results are twofold. First, we find that stringent employment protection legislation is linked to a less dynamic firm growth distribution in sectors which are labour and research intensive. This is reflected in a higher share of stable firms, as well as in slower growth and contraction at the extremes of the distribution. Second, a well-functioning financial system is associated with a more dynamic firm growth distribution in finance-dependent sectors. This is driven by faster growth among the best performing firms, faster contraction of under-performing ones, and a smaller share of stable firms in the middle. Overall, these results suggest that framework conditions have a heterogeneous impact along the distribution of firm growth.