# **1. Introduction**

A rapidly growing number of studies provide evidence of heterogeneity in firm behavior, even within narrowly-defined industries or markets (see Caves, 1998; Bartelsman and Doms, 2000; and Ahn, 2000 for surveys). In all countries studied, there is evidence that the population of firms undergo significant changes over time, both through resource reallocation between existing firms and the process of firm entry and exit. For the study of productivity, the role of within-firm productivity growth _vs_ . the productivity growth induced by the reallocation of resources from less productive to more productive businesses has been the focus of much recent research (see, e.g., Olley and Pakes (1996), Griliches and Regev (1995) and Foster, Haltiwanger and Krizan (2001, 2002)). The impact of changing patterns of international trade on an economy is increasingly viewed through these lenses, with evolving trade relations changing the market structure and mix of businesses (e.g. Helpman, Melitz, and Yeaple, 2004). At the same time, the substantial churning of firms, along with the reallocation of labor across continuing firms, implies that workers and firms incur significant search and other adjustment costs (see, e.g., Mortensen and Pissarides, 1999; and Caballero and Hammour, 2000). The efficiency of an economy in dealing with such reallocation is important not only for the productivity dynamics of the economy, but also for the dynamics of the labor market and in particular of unemployment. For all of these reasons, firm-level dynamics appear to be crucial for the relative success of developed economies and also for the trajectories of transition and emerging economies as they develop and open up markets (see Eslava et. al., 2004; Roberts and Tybout, 1997; Aw, Chung and Roberts, 2002; and Brown and Earle, 2004 for studies on Latin America, East Asia and transition economies, respectively).

Much useful work on these issues has proceeded on a country-by-country basis, using firm-level datasets for a specific country. But there also is a clear interest and need to combine data from multiple countries. This allows in principle an assessment of how much of the observed dynamism at the micro level is due to industry-specific technological factors and market characteristics, and how much is the result of different institutional and policy settings that influence firm behavior and competitive forces in each market. In this paper, we do not specifically address the role of policy and institutions. Instead, we conduct exploratory data analysis exercises of the panel dataset exploiting the variation across countries, industries and time. The dataset, constructed through ‘distributed micro-data analysis’ as described in detail in Bartelsman, Scarpetta, and Haltiwanger (2004), includes indicators built up from (confidential) micro-level sources available to researchers in each of the countries included.<sup>2</sup> We present evidence on the process of creative destruction in a selection of industrialized and developing economies. We focus on the distribution of firm size over time, the frequency and size of firm entry and exit, and the evolution of the (size) distribution of firms by entry-cohort. Further, we analyze the sources of productivity growth at the industry and aggregate levels. We look at the contribution of firm entry and exit to productivity growth as well as at the contribution coming from the reallocation of resources across existing firms. Overall, we provide a comprehensive picture of the magnitude, characteristics and effectiveness of the creative

> 2. The approach to collecting and constructing harmonized firm-level data in this project differs from projects like the ICA project that use the same survey instrument in a number of countries. A discussion of the advantages and disadvantages of the alternative approaches as well as the relationship on key findings from the ICA dataset vs. the type of firm-level data used here is provided in Haltiwanger and Schweiger (2004).  Recent papers that have used the ICA data to study firm performance include Bastos and Nasir (2004), Dollar et. al. (2003), HallwardDriemeier  et al. (2003).

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