# 1 Introduction

Promoting job creation is a policy priority for many governments seeking to create gainful employment for their growing youth population and create pathways to economic transformation. For their potential contribution to this goal, high‐growth firms (HGF) – firms with significant ability to rapidly grow employment – have increasingly attracted the attention of policy makers. Programs catering to these entities tend to rely on broad policy instruments, similar to those used to support SMEs. See Autio et al. (2007) and World Bank (2018) for a review of the evidence on these measures from advanced and developing countries, respectively. Governments in developing countries have scarce resources and administrative capacity to support entrepreneurship and may be concerned about how much of them to devote to HGF promotion in the hope of creating jobs. This is, however, is a simplistic way to frame the issue for policy makers, as HGFs can generate employment but they can also generate spillover benefits for other firms in the economy.

Much attention in the literature and among policy makers has focused on the benefits generated by HGFs and how to implement policies to encourage more HGFs. But HGFs also generate externalities and the net effect on the overall economy is ambiguous. On the one hand, HGFs may exert competitive pressures on input and output prices, crowding out other firms. They may poach workers from competitors, put upward pressure on labor and other input costs, or drive output prices down by exploiting economies of scale. On the other hand, HGFs may generate positive spillovers. HGFs may develop or possess knowledge of technology, organization or markets that may transfer to other firms through movement of employees or demonstration. The knowledge transfer is likely to occur over relatively short distances through face‐to‐face contact with their clients or suppliers or within the labor market. In addition, HGFs' high demand for inputs may generate opportunities for suppliers to exploit economies of scale (Javorcik, 2004), and/or facilitate technology upgrading. Because of their advanced technology, HGFs may sell high‐quality or innovative inputs, benefitting downstream firms using that input. Assessing whether positive or negative spillovers prevail is the empirical question we explore in this paper.

We rely on detailed firm‐level administrative data from Hungary and exploit regional and time variation in the share of HGFs to infer their connection with the performance of other related firms. We focus on vertical spillovers and use the 2‐digit industry input‐output matrix to determine the share of HGFs in upstream and downstream industries. This focus is motivated by the fact that the related literature on MNE spillovers documents stronger evidence for vertical or intra‐industry spillovers rather than horizontal ones. We also consider a more refined measure of horizontal spillovers, or intra‐industry spillovers, where we measure the share of HGFs in the firm’s 2‐digit industry and county, omitting the firms' own 4‐digit industry.

In our empirical strategy, we carefully adapt the methods in the FDI spillover literature to the HGF environment. From a technical point of view, a crucial difference is that the HGF phase is more transient than the FDI one, which, in turn, limits the application of fixed effects methodologies employed in the latter literature. We handle this issue by regressing log differences on the level of spillover measures and firm controls. Relatedly, in contrast with the FDI case, the share of HGFs is mechanistically linked to the growth distribution, generating challenges discussed in the peer effect literature (see, for example, 2