Graduate Institute of International and Development Studies Working Paper 03-2017
This paper analyses the impact of recessions and booms on firm performance. We look at 70,000 firms in over 100 countries between 1986 and 2014 and document the trends in firm entry over the business cycle. Our paper confirms some standard facts about firm dynamics: employment growth is decreasing with size and age; entry rate is pro-cyclical while the exit rate is countercyclical. For example, in case of advanced economies, 97 per cent of employment creation is by firms between the ages of 0 and 5 years, while for developing and emerging economies, it is 86 per cent of all employment. Our main results are: first, we do see selection effects of recessions, particularly when we look at employment, sales and capital. Specifically, when a firm enters the market during good times, they tend to have lower employment and capital than firms that enter the market during bad times. Second, when we look at total factor productivity (TFP), we don't see a clear "cleansing effect" of recessions - more productive firms entering the market while less productive leaving. Third, the effects of entering during a boom or a recession tend to persist for a long time, over 15 years. Fourth, we find notable differences between income groups - while recessions tend to create stronger firms in the advanced economies, booms tend to create stronger ones in case of the emerging economies. Lastly, the effects of recessions on firms tend to vary by sector.
business cycles entry and exit firm performance total factor productivity