surviving firms expand, becoming larger on average as they age. However, the effect decreases as firms get older, turning into a negative correlation (quadratic term is negative).

These findings support results from the dynamic decompositions in the previous section that firms increase productivity at the expense of labor (see the negative cross-term). This result is robust to all measures of productivity. The effect is greater for more productive firms as indicated by the negative quadratic term – the more productive a firm is, the more jobs it sheds except for TFP where the quadratic term is positive. This implies that once capital is factoredin, the negative dynamics between productivity and size of the firm is diminished. In other words, as firms become more productive, they are more likely to shed less jobs when productivity is measured using TFP.

Although this negative correlation between labor and productivity is built-in by construction (labor affects productivity through the denominator), it shows that productivity gains are not achieved through scaling-up production and a more efficient use of inputs. Depending on the productivity measure, an increase of 10 percent in productivity is linked to 1.2 to 4 percent decrease in firm size (i.e. a firm with 100 employees that increased productivity by 10 percent will on average reduce its headcount by 4 employees).

Table B3 focuses on employment growth of incumbent firms – this refers to post-entry growth, excluding exit. Firm size, as the explanatory variable, is constructed in categories corresponding to the average size of the corresponding growth period.<sup>33</sup> Figure A5 in Annexure A shows that patterns differ greatly by country.<sup>34</sup> In South Africa, the relationship with size is not monotonic. Small firms (between 10 to 19 employees), medium (between 50 and 249 employees), and very large firms (500 or more employees) grow around 3 percent faster than micro firms.<sup>35</sup> Firms that are younger, in sectors with lower concentration in terms of sales, and that are more productive, grow faster (columns 1 to 6). There is no significant difference between sectors. Foreign firms grow faster, which may reflect better integration into global value chains. However, once labor productivity is controlled for, foreign firms grow at a slower pace than domestic firms. More productive firms grow faster (columns 7 to 9). This is consistent with the positive between-term in the dynamic decompositions. The quadratic term is positive for output per worker and value added per worker (the more productive a firm is, the faster it grows), but

> 33 Given the inverse correlation between firm size and growth, or “regression to the mean effect”, the current or base size would yield spurious results. The average size avoids the downward bias that results from using the end year of the growth period or the upward bias of coefficients estimated using the base year. 34 International comparisons use the same specification.

> 35 When controlling for productivity, large firms (between 250-499) are also likely to grow faster. Growth rates are likely to be higher the smaller the firm is, although for the same rate a larger firm will add more jobs.

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