evolution in Turkey with other countries in the region. We compare Turkey with Russia, Ukraine, Poland, Romania, EU‐8 and EU‐10 countries and All ECA region<sup>4</sup> . Conditional on survival, small firms are likely to grow quickly. Hence firms in small size group are likely to be young. This is the case in all of the comparator countries except Poland. However, in Turkey there are quite many small firms that are old. This observation might reflect that small firms do not grow enough relative to corresponding firms in the same size group in other countries. Comparison of the growth rates of firms at different size groups in Turkey with the comparator countries supports this argument. Small and medium size firms (SMEs) grow at a slower rate in Turkey.

The rest of the paper is organized as follows. Section 2 explains the data and provides a descriptive analysis of firm growth. Section 3 elaborates on analyzing firm growth. Section 4 compares firm evolution in Turkey with comparator countries from the region as well as with all ECA region combined. Section 5 analyzes effects of business environment on firm evolution. Section 6 provides robustness analysis for the main results. Section 7 provides a policy evaluation and concluding remarks.

# **2. Data and Descriptive Analysis**

Data for this analysis were collected through World Bank’s Enterprise Surveys. It is a comprehensive establishment level database of 1,152 establishments who are interviewed between April 2008 and January 2009<sup>5</sup> . In the survey, a random sample of firms is selected that is representative of the economy. The sample of firms is stratified by sector, size, and location. The survey provides information on firm characteristics, various performance measures, and the business environment. Same survey is implemented in 28 other countries in the ECA region during 2008 and 2009.

In analyzing how firm evolution changes with size, we divide firms into four size groups measured in full‐time employment levels: **Micro** : ≤10, **Small** : 11‐50, **Medium** : 51‐250, and **Large:** ≥251. These groups are constructed according to the employment level of the firms in 2004<sup>6</sup> . We also divide firms into three age groups as: 1‐5, 6‐15, and ≥16. In addition to the cross‐sectional data from 2008 survey, there are 419 firms that were surveyed both in 2005 and 2008. The firms in this panel dataset are from manufacturing sector<sup>7</sup> . Number of firms in the sample in each size and age group for both all data and the panel data are shown in Table 1. As expected, larger firms are more likely to be older.

The survey includes data from manufacturing, retail, and other service sectors. The two digit classification of the industries is made according to ISIC revision 3.1. The list of industries covered in the data and the number of firms at different size groups are given in Table 2. The biggest industry in terms of number of observations is Textiles which is followed by Food industry. For most of the industries size distribution has a long right tail. Small firms make the largest group of firms in almost all industries. Textile industry has the highest share of large firms. The survey data is also inclusive of all regions in

> 4 EU‐10 includes 2009 data from Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, and Slovenia and EU‐8 excludes Bulgaria and Romania from EU‐10 group.

> 5 From here on, I’ll refer to the unit of observation as firm instead of establishment.

> 6 The questions in the survey refer to the last complete fiscal year which is 2007. The survey asks the number of full‐time employees in the last fiscal year and three fiscal years ago which is 2004. Annual growth rates are calculated using these questions.

> 7 The survey conducted in 2005 covered only manufacturing sector.

3