destruction process and, by exploiting the different dimensions of our data, we make the first attempt at understanding the sources of the observed variations across countries and industries. Our country dataset includes 24 economies over a period covering most of the past decade; ten industrial countries, five Central and Eastern European countries in transition, and nine emerging economies in Latin America and East Asia. These countries differ significantly along different dimensions including the underlying economic conditions and the policy and institutional settings.

The remainder of the paper is organized as follows. In Section 2, we briefly review the recent theory on the reasons behind firms’ heterogeneity and the importance of experimentation and learning by doing. In this section, we also discuss how policy and institutional settings may influence firm heterogeneity. We argue that different policy settings may influence firm behavior in multiple ways and that several firm-level indicators are needed to assess how the different policy choices ultimately affect economic efficiency. In Section 3, we provide a brief description of the data for 24 industrial, transition and emerging economies. We then turn to the empirical evidence. In Section 4 we first present the distribution of firms by size; we then document the magnitude and key features of firm dynamics (entry and exit of firms) and, finally, we study post entry performance of different cohorts of new firms. In Section 5 we analyze the effectiveness of creative destruction for productivity growth. We distinguish between the productivity contribution coming from the process of creative destruction (entry and exit of firms) to that stemming from within-firm efficiency improvements and reallocation of resources across incumbents. In the final section, we draw some preliminary conclusions and propose a research agenda to start exploring the links between policy and firm dynamics.

# **2. Firm heterogeneity, market structure and institutions**

## **_Stylized Facts_**

Over the past two decades, evidence has mounted suggesting sizable heterogeneity of firms across different interrelated dimensions, size, growth, market shares, life cycle etc. In particular, some regularities have been found in the growing empirical literature, including (see e.g. Sutton, 1997; Pakes and Ericson, 1998, Geroski, 1995 for surveys):<sup>3</sup> _1. Size and growth:_ The probability of survival tends to increase with firm (or plant) size; but, conditional on survival, the proportional rate of growth of a firm is decreasing in size (see Evans 1987a, 1987b; Dunne et al. 1988, 1989).

_2. The firm life cycle:_ For any given size of firm, the proportional rate of growth is smaller the older the firm, but its survival probability is greater (see Foster _et al._ 2001; and the survey of post entry performance of firms in the _International Journal of Industrial Organization, 1995_ ).

3. _Shakeouts:_ The number of producers in a given market tends first to rise to a peak, and later to fall to some lower level. Entry rates tend to be higher for more recent industries but tend to decline as the industry matures (Klepper and Graddy, 1990; Klepper and Simons, 1993; Geroski, 1995).

3. Amongst others, see Aghion and Howitt (1992) and Caballero and Hammour (1994, 1996). Foster, Haltiwanger and Krizan (2001), Caves (1998) and Bartelsman and Doms (2000) offer further discussion of this literature.

3