due to diminishing returns (in the presence of any fixed factors at the micro level) a decrease in productivity.

- Finally, the net contribution to overall labor productivity growth of the entry and exit of firms (net entry) is generally positive in most countries, accounting for between 20 percent and 50 percent of total productivity growth.  While the exit effect is always positive, i.e. the least productive firms exit the market contributing to raise the productivity average of those that survive, the entry contribution tend to be negative in most OECD countries and in the non-transition  emerging economies.  In transition economies, in all but one country (Hungary over the three-year horizon) the entry of new firms makes a positive and often strong contribution to productivity.  For most countries, while the contribution of net entry is positive, it is less than proportionate relative to the share of employment accounted for by firm turnover.

An open question is whether the observed differences across countries are accounted for by differences in market institutions and policies or whether they reflect different circumstances and/or problems of measurement. As discussed in section 2 and section 3, drawing such inferences from cross country evidence is difficult given that the policy environment may impact in a variety of ways and given the measurement problems. Still, there are some patterns worth noting. In the transition economies in particular, there is a very high rate of firm turnover as a share of total employment and entry accounts for a large (but less than proportionate to the share of turnover) share of productivity growth. The large contribution of entry partly reflects the large rate of firm turnover but it also reflects by construction a positive gap between entrants and incumbents productivity. In interpreting the latter finding, it is useful to put it in the context of the high pace of turnover. In general, it is difficult to interpret differences across countries in the magnitude of the gap between entering and exiting businesses. For example, it might reflect fundamentals driving market selection with new businesses adopting the latest business practices (or in transition economies, new businesses adopting market business practices relative to incumbents) or it might reflect a very high entry barrier so that only very productive new businesses enter. However, the latter explanation might suggest that firm turnover rates should be reduced which does not appear to be the case for the transition economies. Still, for the transition economies the contribution of net entry is far from proportionate suggesting that there is substantial churning of businesses via entry and exit that is not productivity enhancing in transition economies.

It is also interesting to note that the entry of new firms has variable effects on overall productivity growth in OECD countries. On the whole, data for European countries show that new firms typically make a positive contribution to overall productivity growth, although the effect is generally of small magnitude. By contrast, entries make a negative contribution in the United States for most industries and a stronger than average contribution tends to come from the exit of low productivity firms. Interpreting these findings without more information is difficult. The weak performance of entrants in the U.S. might reflect greater experimentation in the U.S. so that for each entering cohort of entrants there is more selection and potentially more learning by doing. Some evidence in favor of this interpretation is provided in Haltiwanger, Jarmin and Schank (2003), Foster, Haltiwanger and Krizan (2001, 2002) and Bartelsman and Scarpetta (2004). The former paper provides evidence of greater market experimentation in the U.S. relative to Germany. The latter shows that in the U.S. that as the horizon lengthens in the U.S., the contribution of net entry rises disproportionately. Moreover, Foster et. al. show that the increased contribution of net entry is due to both selection of the low productivity entrants and due to learning by doing to successful entrants.

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