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Alternative Measures of Business Entry and Exit

By Ron Jarmin, Javier Miranda, and Kristin Sandusky

September 16, 2003

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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?

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Background and Motivation (cont.)

• International comparisons of business dynamics require comparable statistics on– Firm entry and exit– Firm growth

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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

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Overview

• Data– LBD– Establishment, Firm, Firm-Geography

• Turnover (entry plus exit) rates• Entry Size• Post Entry Growth• Conclusions

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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.

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Measures

• Turnover (Entry rate + Exit Rate)• Entry Size• Post Entry Growth

• Computed for:– Firms – Establishments– Firms defined by the State boundaries

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DataTABLE 1: Number of Establishments and Firms: 1977, 1982, 1987, 1992, 1997

Year EstabsFirm-state

units Firm units

Firm-state units

associated to multi-state

firms

Share of Firm-state units

associated to multi-state

firms

Share of Employment

by Multi-state Firms

1977 4,656,742 3,926,831 3,827,383 131,156 3.34 16.51

1982 4,884,487 3,995,457 3,884,326 145,834 3.65 17.07

1987 5,552,964 4,548,549 4,419,720 168,751 3.71 16.94

1992 5,925,191 4,783,781 4,633,060 198,049 4.14 18.1

1997 6,480,320 5,259,640 5,093,868 215,119 4.09 20.34

Source: Own Calculations from LBD data.

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.4.5

.6.7

.8.9

1R

ates

7782 8287 8792 9297year

TR: Establishment TR: Firm

TR: Firm-State

Own Calculations from LBD data

Turnover Rates: by Establishment, Firm, Firm-State

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.4.5

.6.7

.8.9

1R

ates

7782 8287 8792 9297year

Establishment Firm

Firm-State

Own Calculations from LBD data

by Establishment, Firm, Firm-StateTurnover Rates Weighted by Employment:

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.4.5

.6.7

.8.9

1R

ates

7782 8287 8792 9297year

JTR: Establishment JTR: Firm

JTR: Firm-State

Own Calculations from LBD data

Job Turnover Rates: by Establishment, Firm, Firm-State

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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.

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Table 2: Average entry size: by Firm, Firm-State.

Cohort Year Av. Size Median Size Av. Size Median Size77 77 13.71 3.96 12.40 3.9782 82 19.53 5.26 16.00 4.6287 87 20.35 5.08 19.06 5.0792 92 19.66 6.17 18.12 5.9097 97 22.95 5.81 21.95 6.14

Source: Own Calculations from LBD data.

FirmFirm-State

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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.

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12

34

51

23

45

77 82 87 92 97 77 82 87 92 97

77 82

87 92

Establishment FirmFirm-State

Gro

wth

Rat

es

Year

Source: Own Calculations from a 10% Sample of the LBD

Post-Entry Growth: by Cohort

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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.

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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.