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Determinants of Entrepreneurial Outcomes in Emerging Markets: Role of Initial Conditions

This discussion explores the factors affecting entrepreneurial outcomes in emerging markets, focusing on the role of initial conditions. It investigates the employment growth patterns of small and large firms, selection effects, distribution tests, and the impact of financial development on growth. The findings challenge assumptions about the relationship between finance, firm size, and economic development.

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Determinants of Entrepreneurial Outcomes in Emerging Markets: Role of Initial Conditions

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  1. Discussion of “What Determines Entrepreneurial Outcomes in Emerging Markets?Role of Initial Conditions” Miriam Bruhn Finance and Development: The Unfinished Agenda November 2, 2016

  2. Figure 1 shows a big jump in employment for large firms between age 1 and 2 • Much bigger jump than for small firms • Why this this not reflected in the employment growth results?

  3. Growth before age 8 looks much higher than in Hsieh and Klenow (QJE 2014) • What drives this difference? • Is India representative of other countries?

  4. Small entrants have 16 employees at age 1 and about 21 at age 2 • 5.4/16 = 31% increase • Large entrants have 67 employees at age 1 and about 98 at age 2 • 31/67 = 46% increase • Both of these numbers are large increases in one year! • Selection effects, i.e. do the smallest firms go out of business?

  5. In the US, about 20% of firms go out of business between age 1 and 2 • Average number of employees is 7.5 at age 1 and 9.4 at age 2 • 1.9/7.5 = 25% increase

  6. Distribution tests • Compare distribution at age 2 to distribution at age 8 • No evidence that distribution at age 8 is truncated at lower end • Distribution at age 8 is more dilated  Is this consistent with no difference in growth rates for small and large firms? • Do results change if comparing distributions at age 1 and age 8? Frequency Number of employees

  7. Findings on financial development • Surprising that financial development does not matter for growth, only for initial size • Shouldn’t availability of finance allow firms to make more investments, which would lead to growth? • In financially developed states, entrants are smaller, but also more numerous (as a % of total firms) • What does this finding mean for economic development? • Suggests that finance relaxes constraints, but at the same time we don’t see an increase in small firms’ growth rates… • What is the optimal firm size?

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