National and Regional Perspectives
Edited by Michael Fritsch
Chapter 7: Firm Growth, Institutions, and Structural Transformation
Magnus Henrekson and Dan Johansson INTRODUCTION For a long time, large firms were considered to create new employment and economic growth, mainly due to economies of scale in production as well as in research and development (for example, Schumpeter, 1942; Galbraith, 1956, 1967). This conventional wisdom was challenged by Birch (1979) who in an empirical investigation claimed small firms to be the main job generators. Birch’s results and his conclusions have been questioned and sparked up a debate; see Kirchhoff and Greene (1998) for a review of the discussion. Van Praag and Versloot (2008) summarize the empirical evidence on job creation by small firms, and conclude (p. 135) that it is an unambiguous result that small firms create more jobs on net than large firms, even when the methodology suggested by the critics is applied. Subsequent research shows that a fairly small number of highgrowth firms (HGFs) – on average smaller and younger than other firms – contribute the bulk of net employment; see Henrekson and Johansson (2010) for a survey. This chapter has its starting point in a generally overlooked part of the critique that certain firms – be they small, young or rapidly growing – are of particular importance for job creation and economic growth. This critique asserts that growth has to be understood in a broader perspective entailing considerable churning and restructuring (for example, Haltiwanger and Krizan, 1999).1 In fact, rapid growth of some firms implies that they attract factors of production from other firms. Growth therefore requires contraction and...
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