# **4. Assessing the process of creative destruction**

## **_The distribution of firms by size: sector specialization or framework conditions_**

The first step in our analysis of creative destruction is to look at the distribution of firm by size across countries and industries. Firm size is an important dimension in our analysis for several reasons. As discussed above, small firms seem to be affected by greater churning, but also have greater potential for expansion. Thus, a distribution of firms skewed toward small units may imply higher entry and exit, but also greater post entry growth of successful firms. Alternatively, it may point to a sectoral specialization of the given country towards newer industries, where churning tends to be larger and more firms experiment with different technologies. However, as for all our firm-level indicators, any observed difference in one single indicator – like firm size -- cannot, per se, be taken to indicate differences in the magnitude or characteristics of creative destruction. The distribution of firm by size is likely to be influenced by the overall dimension of the internal market – especially for non-tradeables – as well as the business environment in which firms operate that can discourage firm expansion (see below). So, the analysis of firm size should be taken as one of the aspects that together with the others on firm demographics and the productivity decomposition will enable to identify a coherent story about cross-country differences in creative destruction.

It should be stressed at the outset that our analysis is affected by the different thresholds used on firm size. For most countries the data cover all firms with at least one employee. But the cutoff size is 5 employees in South Korea and Venezuela (with a random sample of smaller),<sup>8</sup> 10 employees in Chile, Colombia and Indonesia. Second, even amongst the countries for which data cover all firms with at least one employee, data may be at the establishment level instead of the plant level, and the definition of both may vary across countries. Third, data for some countries are based on other selection criteria, which might induce some bias in the results which cannot be determined a priori (e.g. in France data exclude firms with a turnover below a given threshold). Finally, from a sectoral perspective, community services and utilities are more difficult to compare, given the important role of the public sector, whose coverage changes from country to country, and of regulation in these sectors.

Table 2 suggests that in all countries the population of firms is dominated by micro units (with less than 20 employees).<sup>9</sup> They account for at least 80 percent of the total firm population. Their share in total employment is much lower and ranges from less than 15 percent in some transition economies (e.g. Romania) -- which still reflects the presence of large (formerly or still) state-owned firms inherited from the central plan period -- to less than 20 percent in the United States and around 30 percent or more in some small European economies.<sup>10</sup> 8. However, the enterprise survey in Venezuela is representative of all firms with at least 15 employees, and only includes a random sample of firms below this threshold. In our analysis, we have used the data for Venezuela with reference to firms with 20+ employees, given the lack of coverage for the lover size classes.

9. For proper comparability, the Table excludes all countries for which the size threshold is 5 or 10 employees instead of one.

10. The Table reports the share of firms with fewer than 20 employees over the total number of firms or total employment for the countries for which we have all firms with at least 1 employee.

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