the 2010 round of Enterprise Surveys. However, these survival rates are high when compared with OECD averages, which could be explained in part by a low level of competition.<sup>3</sup> Firms the EMES sample also show surprisingly low employment growth rates since inception. Average annual employment growth in micro firms is only 5 percent (equivalent to one employee every four years for a 5-employee firm). Firms that started with more than 10 employees have added few workers and many have actually downsized, while firms which began with 11-50 workers have contracted by 2.4 percent per year. An important caveat is that the survey does not observe firms of more than 50 employees (14.7 percent of firms in these cities, according to the Economic Census), and also that for many firms downsizing brings efficiency gains that allow them to stay afloat, so negative growth in employment does not necessarily imply productivity loss.<sup>4</sup> Still, it is worrisome that employment growth is so low as it reflects the difficulties of these firms to expand the scale of their operations.

**Figure 3: Firm survival, age and growth**

<!-- Start of picture text --> A: Firm age B: New employees added per year, by size at start<br>20<br>15<br>10<br>5<br>0<br>-5<br>0 20 40 60 80 0 10 20 30 40 50<br>Edad de la empresa en años Firm employment at start, including owner(s)<br>Source: EMES<br>20<br>15<br>10<br>Por ciento<br>5<br>New employees added per year<br>0<br><!-- End of picture text --> The revenue generation capacity of sampled firms is also limited, with an average of US$55,000 per year in gross sales. The median firm, however, generates only US$12,000 per year, and 50 percent of firms generate between US$5,800 and US$34,000 in sales per year. In general, firms appear to have a limited ability to generate sufficient income to cover the basic needs of firm owners and their families or, 3 Although it is not possible to compute exact survival rates with a cross-section of firms, looking at the age distribution provides a rough idea of the extent of “churning” among firms; if the age composition is biased towards young firms it is likely that survival rates are low, and vice-versa if the distribution is biased towards older firms. In the case of Ecuador, the fact that only about 20 percent of firms is less than 2 years old suggests that the survival rate is higher than in OECD countries, where it is estimated that between 20-40 percent of entering firms fail within the first two years, so that–assuming that there is no firm entry in a 2-year period—at most 80 percent of firms would be older than 2 years. Since it is not realistic to assume zero entry for two years, it must be the case that at any given time the age distribution shows less than 80 percent of firms being two years and older. In Ecuador more than 80 percent of firms are older than two, which means that the survival rate is probably much higher than the average for the OECD. In turn, this is consistent with low rates of firm exit, which typically occur when there are high exit costs. See López-García and Puente (2006).

> 4 When comparing this low employment generation with the Enterprise Survey data for Ecuador—which includes firms of all sizes—the results are not particularly different. Firms which had 50 employees or less in 2007 have on average added less than one new employee per year, virtually the same rate as all of Latin America (LAC Enterprise Surveys, 2010).

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