Business Dynamics Review of Egypt

Annex A. Indicators of business dynamics

Several key indicators are used internationally to track business dynamics. These include mainly entry and exit rates, share of employment of young firms, job creation and destruction, and job reallocation rate.

The entry rate measures the rate at which new businesses are established within a specific market or industry over a defined period. A higher entry rate suggests a dynamic economy where entrepreneurs are willing to invest in new ventures. Conversely, a low entry rate may suggest the presence of barriers to entry and entrepreneurship constraints.

The entry rate can be calculated as the number of entering units over the total number of units (incumbents + entering) at time t in cell c. The cell can be, for example, the industry at two-digit level or the macro-sector.

$Entry=\frac{I_{c,t}^{ent}}{I_{c,t}^{ent}+ I_{c,t}^{inc}}*100$

Entering units ($I_{c,t}^{ent}$) represent units that are not present in t-1 but are present in t (potentially with positive employment). Alternatively, if the year of establishment is present in the dataset, entering units can be identified by the year of establishment.

Incumbent units ($I_{c,t}^{inc}$) represent units that are present in both t-1 and t.

The exit rate measures the rate at which businesses cease operations or leave a particular market or industry over a specified period of time. Industries with high exit rates might undergo significant restructuring or consolidation. A low exit rate can indicate a healthy competitive environment where firms are able to survive and thrive, but also the lack of intense competition or inefficient policies preventing non-productive firms to exit the market.

The exit rate represents the number of exiting units ($I_{c,t}^{exit}$) over the total number of units (incumbents + exiting) at time t in cell c.

$Exit=\frac{I_{c,t}^{exit}}{I_{c,t}^{exit}+ I_{c,t}^{inc}}*100$

Exit units represent units that are present in t-1 but are not present in t. Alternatively, if the data of exit are present, exiting units can be identified by the year of death.

The share of employment in young firms measures the extent to which young businesses contribute to total employment. Young firms are typically more dynamic and innovative, contributing significantly to job creation. Industries with higher shares of employment may indicate a vibrant entrepreneurial ecosystem. Governments and policy makers often use the share of employment from young firms to assess the impact of policies aimed at supporting start-ups and small businesses.

The share of employment in young firms is measured as the ratio between total employment of young firms (e.g. age < 6 years) and total employment in cell c at time t.

$S{h}_{young}=\frac{em{p}_{c,t}^{young}}{em{p}_{c,t}}*100$

Gross job creation (JC) refers to the total number of new jobs created within an economy or an industry. It thus accounts for all positive employment changes between one year and the other, excluding the negative changes. A high level of gross job creation indicates that businesses are expanding their operations, which are usually linked with economic expansion. Start-ups and new businesses have been found to play a significant role in gross job creation (Calvino, Criscuolo and Menon, 2016[1]).

JC is calculated as the sum of all positive unit-level employment variations between t-1 and t in cell c:

$J{C}_{c,t}=\sum _{i \in c }{∆}^{+}em{p}_{i,t}$

${∆}^{+}em{p}_{i,t}$ means only positive variations in $em{p}_{i,t}-em{p}_{i,t-1}$ are counted.

Gross job destruction (JD) refers to the total number of jobs lost within an economy or an industry over a specific period. High levels of gross job destruction often indicate economic contraction or downturns. It suggests that businesses are reducing their workforce, for example due to factors such as declining demand, technological changes or financial difficulties. While job destruction can be seen negatively, it also reflects the economy’s ability to reallocate resources towards more productive uses and can serve as long-term economic growth and competitiveness.

JD is calculated as the absolute value of the sum of all negative unit-level variations between t-1 and t in cell c:

$J{D}_{c,t}=|\sum _{i \in c }{∆}^{-}em{p}_{i,t} |$

The job creation rate (JCR) and job destruction rate (JDR) are simply the gross job creation (or gross job destruction) divided by the average employment between t and t-1.

The gross job reallocation rate measures the total movement of jobs within an economy over a specific period, including both job creation (expansions) and job destruction (contractions). A high gross job reallocation rate indicates a dynamic economy where businesses are actively adjusting their workforce to respond to changing market conditions, technological advancements and shifts in consumer demand. The reallocation of jobs reflects the ability of an economy to efficiently allocate resources, including labour, across different sectors and firms.

It is calculated as the job creation in cell c plus job destruction in the cell, over total employment (often measured as the average between total employment in the cell in period t and total employment in period t-1).

$Jo{b}_{real{l}_{rate}}=\frac{J{C}_{c,t}+J{D}_{c,t}}{\frac{1}{2}[em{p}_{c,t}+em{p}_{c, t-1}]}*100$

References

[1] Calvino, F., C. Criscuolo and C. Menon (2016), “No Country for Young Firms?: Start-up Dynamics and National Policies”, OECD Science, Technology and Industry Policy Papers, No. 29, OECD Publishing, Paris, https://doi.org/10.1787/5jm22p40c8mw-en.