Blog Post

High growth firms and job creation in Europe

While all forms of entrepreneurship play a critical role in the economy, a growing body of evidence has shown that it is the high-growth firms that are the key drivers of innovation and job creation.

By: and Date: December 19, 2014 Topic: Innovation & Competition Policy

As shown in this report by the Kauffman Foundation, by and large, job creation has come from young firms (about two thirds, focusing in the US). With a broader sample of countries, this report by the OECD also confirms that young firms are the main contributors to net job creation in an economy. As it is presented, despite the fact that majority of the employment is in older companies, around 50% of all new jobs are created by young firms. When considering not only the jobs that are created but also the ones that are destroyed, we can see that young firms are the only ones contributing to net job creation, that is, their aggregate gross job creation is higher than their gross job destruction. This pattern is also evidenced in this report by the Kauffman Foundation. Furthermore, among these young firms, the high-growth ones (known as Gazelles) are mainly responsible for these new jobs, as explained in the first report by Kauffman and also in this report by EU INNOVA.

Accordingly, if generating employment is a key goal, Junker’s investment plan needs to facilitate the creation and growth of Gazelles, the engines of employment in the economy.

In the charts below, we explore the dynamics of entrepreneurship in Europe and the importance of focusing on young, high-growth firms to foster sustainable job creation. In the first chart, we can see that entrepreneurship across most countries in Europe was negatively affected by the crisis.

Change in Firm Birth Rates, 2010 – 2012 vs 2007 – 2009 

Source: Bruegel based on Eurostat

Notes: The color scale represents the change in the average firm birth rate between the periods 2010-2012 and 2007-2009. Green means that the average birth rate in 2010-2012 was larger than in the previous period, and the opposite for red. The firm birth rate is computed as the total number of firm births by 1000 inhabitants. Last available data for Finland remounts to 2011.

The color of each country indicates the change in the average birth rate between the periods of 2010-2012 and 2007-2009, in order to visualize the impact of the European crisis on firm creation. Most of the countries are red, indicating that firm creation has come down. The crisis affected entrepreneurs’ capacity not only to create but also to grow businesses. Moreover, we can see in this report by the eurobarometer that the willingness to become an entrepreneur decreased or stagnated in all the European countries. This potentially means that people are not only less able to create and grow firms but are also less willing to take the risk of becoming entrepreneurs.

The exceptions tend to be in those countries in which there were perhaps explicit or implicit incentives for self-employment, such as in France, where an “auto entrepreneur” legislation was implemented in 2010.

In the next chart, we show how the capacity of new firms to achieve maturity (survive at least 5 years) was affected by the crisis, mostly in the South, Eastern and Baltic countries.

Five years Survival rates

Source: Bruegel based on Eurostat

Notes: The survival rate is the number of enterprises newly born in t-5 having survived to t divided by the number of enterprise births in t-5 in percent. In the chart we see the cohort of firms that survived until 2009 and were born in 2004, the one that survived until 2010 and were born in 2005, and so on. Available countries in the south category: Italy, Spain and Portugal; Core and North: Denmark, Germany, France, Luxemburg, Netherlands, Austria, Sweden and United Kingdom; Eastern and Baltic: Bulgaria, Estonia, Latvia, Lithuania, Hungary, Romania, Slovenia, and Slovakia, Poland and Czech Republic.

It can be seen from this chart that the percentage of firms that were born before the crisis and experienced it, that is, the ones that survived until 2010 (born in 2005), decreased in all the considered countries when compared with the ones that survived until 2009 (born in 2004). However, while young firms in South, Eastern and Baltic countries continue facing lower survival rates along all the considered periods, the core and north countries were less affected. The latter categories of countries were, in general terms, also less heavily affected by the crisis.

In order to reverse this situation and decrease Europe’s levels of unemployment, it is important to focus in Gazelles, as these are the drivers of sustained net job creation. In the following chart, we show that Gazelles are predominately in high tech or knowledge intensive sectors.

Sectorial Proportion of Gazelles among Total Young Firms

Source: Bruegel based on Eurostat

Note: The chart indicates the proportion of Gazelles among total population of young firms across the presented sectorial divisions.We use Eurostat’s sectoral aggregation by knowledge intensity (measured by e.g. R&D and Human Capital intensity) and differentiate between services and manufacturing. Furthermore, within the high-knowledge intensive sectors, we further distinguish market services (e.g. management services, architectural and engineering activities), high-tech services (e.g. telecommunication and computer programing), financial services and others (e.g. public administration, education, health and social work). The high-tech manufacturing industries include, for example, pharmaceutical, computer or spacecraft products.

As seen in the chart, Gazelles are predominantly in Knowledge Intensive Market and High-Tech services, and also in High-Tech Manufacturing, demonstrating the importance of knowledge for these top performing firms.

To complement this view, in a survey conducted by Eurostat in 2010, entrepreneurs were asked about their main perceived challenges for 2011-2013. According to this survey, Gazelles’ founders indicated that, on average, the main factors limiting their growth, after macro conditions, were the difficulties in accessing a skilled workforce and finance. Furthermore, after maintaining their current operations and growing their domestic activities, the main reason why they needed to access finance was to invest in innovation and R&D, which in turn can have further positive spillovers in the economy.

Another major concern that was reported was the heavy regulatory framework there firms face. Fragmentation of regulation across Europe is another barrier for the growth of these firms. In a future paper we will analyze which types of regulations have been more effective in stimulating entrepreneurship. We will also look further into the particular financing challenges facing high growth firms.

In conclusion, we have shown that entrepreneurship was negatively affected by the crisis in the majority of countries in Europe, limiting the creation and survival of firms.

In order to generate the job creation Europe desperately needs, Juncker’s investment plan should not only address SMEs in general, but focus specifically on facilitating the creation and growth of young, high-growth firms. Gazelles are responsible for a disproportionately large share of the net job creation in an economy and are predominantly knowledge-driven.

Therefore a growth plan for Europe should focus on creating the proper framework conditions for the creation and cross-border growth of knowledge-intensive firms, easing access to finance and facilitating investment in innovation and R&D.  Likewise, a strong investment in further improving the skills of the current and future workforce is also critical.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Podcast

Podcast

Italy's economic and political outlook

In this week's Sound of Economics, Bruegel affiliate fellow, Silvia Merler, is joined by Marcello Minenna, PhD lecturer at the London Graduate School and Head of Quants at Consob, as well as Lorenzo Codogno, LSE visiting professor, to discuss the Italian government's economic outlook in the European context.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 11, 2018
Read article More on this topic More by this author

Blog Post

World Cup Economics

As we approach the final rounds of the tournament, here are some recent contributions about the economics and economic impact of the World Cup.

By: Silvia Merler Topic: Global Economics & Governance Date: July 9, 2018
Read article More on this topic

Opinion

Making Italy grow again

On March 4th, Italians sent a resounding message in favour of a break with the past. The ultimate test for the new ‘government of change’ will be whether it succeeds where all others have failed over the past two decades: bringing the country back to growth. The authors propose three different actions to revamp Italy’s ailing productivity and gear the country’s productive capacity towards the 21st century: human capital, e-government, and green growth.

By: Simone Tagliapietra, Alessio Terzi and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 26, 2018
Read article More on this topic More by this author

Blog Post

Demographics and Long Run Growth

Scholars have been investigating the relationship between demographics and long term growth, in the context of the secular stagnation hypothesis. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: June 18, 2018
Read article More on this topic

Blog Post

Robots, ICT and EU employment

Disruptive technologies based on ICT, robots, and artificial intelligence have transformed labour markets through their important effects on employment. As the number of industrial robots continues to rise, our results imply that some measures to facilitate workforce transition and accommodate the rise of automation might be needed to maintain satisfactory labour market outcomes.

By: David Pichler, Georgios Petropoulos and Francesco Chiacchio Topic: Innovation & Competition Policy Date: June 15, 2018
Read article More on this topic More by this author

Podcast

Podcast

Robots: Positive or negative for EU employment?

Bruegel research fellow Georgios Petropoulos features in this episode of ‘The Sound of Economics’ to discuss a study he has co-authored on the impact of robotisation on employment in Europe.

By: The Sound of Economics Topic: Innovation & Competition Policy Date: May 29, 2018
Read article More on this topic More by this author

Blog Post

The effects of Brexit on UK growth and inflation

The full consequences of Britain’s vote to leave the European Union were never going to be immediately perceptible. As we approach the second anniversary of the UK’s Brexit referendum, we can compare the subsequent economic data for the UK and the euro area and see how it diverges from the trends established before the vote.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: May 23, 2018
Read about event

Past Event

Past Event

Youth up Europe: The future of work: towards safeguarding young people's rights in the era of increased digitisation

This event will discuss what impact digitisation will have on the employment opportunities for young people and how we can safeguard their rights.

Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Av. Rei Humberto II de Itália, 2750-642 Cascais Date: May 10, 2018
Read article More on this topic More by this author

Blog Post

Did Economics Fail?

The debate about rethinking economics keeps rambling. We summarise newest contributions to this important discussion.

By: Silvia Merler Topic: Global Economics & Governance Date: May 7, 2018
Read article More on this topic More by this author

Opinion

The upheaval Italy needs

While Italy remains without a new government, it would be foolish to believe that a country where anti-system parties won 55% of the popular vote will continue to behave as if nothing had happened. But political upheavals sometime provide a unique opportunity for addressing seemingly intractable problems. After its political upheaval, Italy now needs an economic one.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: April 30, 2018
Read article Download PDF More on this topic

Working Paper

The impact of industrial robots on EU employment and wages: A local labour market approach

In theory, robots can directly displace workers from performing specific tasks (displacement effect). But they can also expand labour demand through the efficiencies they bring to industrial production (productivity effect). This working paper adopts the local labour market equilibrium approach developed by Acemoglu and Restrepo to assess which effects dominate and the impact of robots on wage growth and employment rate in Europe.

By: Francesco Chiacchio, Georgios Petropoulos and David Pichler Topic: Innovation & Competition Policy Date: April 18, 2018
Read about event More on this topic

Past Event

Past Event

Robots and artificial intelligence: The next frontier for employment and EU economic policy

This event looked at the impact of robotics and artificial intelligence on employment, wages and EU economic policy.

Speakers: Pat Bajari, Julia Bock-Schappelwein, Anna Byhovskaya, Paola Maniga, Mario Mariniello, Clara Neppel, Loukas Stemitsiotis, Georgios Petropoulos and Barry O’Sullivan Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 18, 2018
Load more posts