5 December 2017
Not all places are good places for running businesses. According to new OECD data, 10% of firms are newly created every year, but regions can differ considerably. At the top end of the range, business creation rates per year can reach up to 25%, whereas the least dynamic regions only recorded business creation rates of around 5%.
In its report The Geography of Firm Dynamics, the OECD shows that within-country differences in the rate of firm creation are higher than 5 percentage points in 10 countries out of 22. Countries with large regional disparities include Austria, Canada, Denmark, France, Israel, Italy, Norway, Portugal, Spain, and the United Kingdom. This persistence of disparities pleads in favor of a better mobilisation of unused resources within countries.
Several characteristics of regions tend to predict their level of business dynamism. On average, cities are more dynamic than rural areas, showing higher levels of both creation of new firms and closure of existing ones, a process which can foster a more efficient allocation of resources and increased productivity. Other factors that tend to boost business dynamism are more under control of policy makers, such as a good local governance, business-friendly regulation and low corruption perceived by citizens. Furthermore, the report shows that effective policies and targeted spending on R&D as well as higher education of the labour force can contribute to firm creation. For instance, a 1% increase in the share of the regional workforce that is tertiary-educated raises the net firm creation rate by 0.46%.
Whether the business environment is characterised by a prevalence of small firms or large firms also helps to explain the observed differences in the rates of firm creation and destruction. On average, regions with smaller firms show higher firm dynamics, although for cities the presence of a few large firms concentrating an important share of the employment is crucial to connect other firms to international markets and to foster entrepreneurial activity. In contrast, rural areas where a few firms dominate regional employment show a lower business dynamism.
The largest firms tend to concentrate their headquarters in large cities. As a consequence, capital regions control 7 percentage points more jobs than those physically located in the region. In Finland and France, this additional control over jobs rises to 11 and 12 percentage points in the capital regions of Ile-de-France and Helsinki, respectively.
The creation of new firms can be an important source of new jobs. Newly created firms generate on average 3% new jobs, but the most dynamic regions can generate up to 8% of new jobs through new firms. However, not all firms directly create jobs as they do not have employees. The importance of such non-employer firms varies by country, their proportion among all firms ranging from 20% to 68%. Such differences depend on tax codes and legal systems. The impact of firm creation (and destruction) on employment goes beyond the number of jobs created in new firms. Firm dynamics can also contribute to employment creation in existing firms, through a competition effect that tends to make existing firms more efficient. In this respect, the report documents that policies to support firms in European countries are more effective in terms of job creation and value added generation in firms that are located in regions with higher firm dynamics.
Access the publication: The Geography of Firm Dynamics: Measuring Business Demography for Regional Development
For further information or comment, please contact: Paolo VENERI (Paolo.VENERI@oecd.org)
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