Declining business dynamism

Abstract

This paper analyses the trends in business dynamism across 18 countries and 22 industries over the last two decades, using highly representative comparable data. It highlights that declines in business dynamism have been pervasive in many countries and are driven by dynamics occurring at a disaggregated sectoral level, rather than reallocation across sectors. Focusing on average trends within sectors in each country, steady declines are evident over the last two decades even after accounting for the role of the business cycle. The paper explores the determinants of these declines, focusing on the role of structural and policy factors. A prominent role of market structure and firm heterogeneity emerges. Investments in intangibles and digital technologies, globalisation, and changes in demographics are also found to affect the trends. Policy can, however, help boost business dynamism, by reducing barriers to entry and to knowledge diffusion, favouring experimentation and creative destruction, while increasing absorptive capacity and the potential of firms to benefit from technological change.

Firms’ solidity before an exogenous shock: Covid-19 pandemic in Italy

“…Considering business dynamics (in terms of firm entry, growth, and survival), the pre-crisis period has been characterized by an increase in the productivity gap between leaders and laggards, declining entry rates, job reallocation, and increasing industry concentration ( Bajgar et al, 2019 ). These trends may be grounded in a lack of capabilities and incentives for younger and smaller firms to innovate and adopt new technologies ( Calvino et al, 2020 ). Furthermore, pre-crisis heterogeneity in firm size and age is likely to affect the vulnerability to the financial shock caused by the crisis.…”