Firm dynamics and job creation: revisiting the perpetual motion machine

Key findings of this note are.

• firms that are born very small, tend to die young;
• a small number of firms that start out very small are a source of significant job creation; and
• job creation is concentrated in the early stages of firms lives, whatever their size, and creation of new firms is a key driver of job growth.

Analysis of “digital” firm dynamics emphasises that these patterns are important for growth and structural change in the economy.

“Digital” firms have higher death rates (low survival rates) than other firms but higher contributions to overall growth, measured by growth in employment or sales of surviving firms. And, in this comparatively new sector, growth is more highly concentrated in firms that are born small compared to non-digital (comparator) firms.

These findings are consistent with the view that firm birth, death and growth involves a considerable degree of trial and error and searching for a match between firm capabilities, business ideas and market demand.

That said, these observations are not definitive. They are only suggested by the analysis in this note, which is descriptive.

The data in this note only distinguishes firms by when they are born, by broad industry group and by birth size groupings. Numerous other factors are likely to affect decisions to start, grow or close a business. 

Future research could usefully investigate the characteristics of surviving and high growth firms and individuals that are employed by or own these firms to determine, for example, the extent to which early stage firm survival and growth reflects trial and error and creative destruction – with the old giving way to the new – versus people shifting periodically between employment and self-employment for reasons of necessity or in response to changes in labour market norms or regulation.

The findings in this note also suggest that future research also differentiate between firm dynamics in different industries.