High-growth firms: Facts, fiction, and policy options for emerging economies
By Denis Medvedev, Arti Grover, and Ellen Olafsen
Policies to create jobs, promote entrepreneurship and growth are key priorities for many emerging economies. Designing and implementing reforms is particularly challenging as policy makers attempt to strike a balance across sectors, firm size and incentives that can sustain growth in a rapidly changing global economy.
High-growth firms (HGFs)–accounting for approximately 3–20 percent of the manufacturing and service industries — are of particular interest as a growth model considering their contribution to more than 50 percent of new jobs and sales in in these sectors. Analysis of high-growth firms in Brazil, Côte d’Ivoire, Ethiopia, Hungary, India, Indonesia, Mexico, South Africa, Thailand, Tunisia, and Turkey is offering evidence that challenges some of the conventional views defining HGFs and the sectors where they can prosper.
A commonly shared view of a typical high-growth firm is a small start-up in a high-tech sector that grows rapidly over a sustained period through some favorable quality inherent to the firm — a new advanced technology, a brilliant marketing innovation, or an extremely capable staff. Using this lens, it is not uncommon for many policy makers to seek selective targeting of firms perceived as having the potential for high growth and providing them with access to financial and technical resources to realize this potential.
A new report by the World Bank Group, High Growth Firms: Fact, Fiction and Policy Options for Emerging Economies, looks at the characteristics of high-growth firms; drivers of high-growth; and what this means for policymakers beyond a selective bias.
According to the report, high-growth firms are young but not necessarily small. HGFs firms tend to be younger than the average firm. Although for many, the high-growth episode begins after the start-up phase. Start-ups account for about 40 percent of all HGFs in Brazil, Cote d’Ivoire, Ethiopia, and Hungary, and around 30 percent in Indonesia. Also, high-growth firms in developing countries are not necessarily small. Many are larger than the average firm at the beginning of a high-growth episode such as in Indonesia, where nearly half of HGFs employed more than 50 workers. It is also not surprising that HGFs end up larger at the end of the high-growth episode. With the exception of Hungary, HGFs in all countries included in the analysis end up being at least 4 percent larger than an average firm after the high-growth episode.
High-growth firms are found in all types of sectors and locations. It is a common misconception that HGFs are found in only high-tech industries. In fact, these firms exist in all types of sectors and operate across a range of locations. The experience across the different regions bears no clear cross-country pattern indicative of target sectors with a greater chance of observing HGFs. Sectors with a more knowledge or technology-intensive profile often exhibit higher than average HGFs, but so do other sectors that are substantially less high-tech. For example, in Hungary, HGFs are more prevalent in knowledge-intensive services. However, in Mexico the number of HGFs is particularly high in computers, electronics, electric appliances, and communications, measurement, and transportation equipment — but also in in textiles.
High firm growth is short-lived and episodic. It is difficult for firms to sustain high growth. As a matter of fact, the likelihood of a repeated episode, either immediately or later in the firm’s life cycle, is low. Some firms transition from high growth to low growth or vice versa, while many others exit the market altogether following a high-growth episode. Evidence in the report strongly validates this insight. For example, in Tunisia, more than one-third of firms that were in business between 1996–2009 achieved HGF status at least once. However, just 0.01 percent of firms experienced high-growth continuously throughout the same period.
What drives growth?
Innovation, network economies, managerial capabilities and worker skills and global linkages contribute significantly to the probability of a high-growth episode.
- Innovation can strengthen firm growth. In India, service firms that introduce new products and export are significantly more likely to experience a high-growth episode. In addition, high-growth events in manufacturing and services are driven by persistent rather than occasional R&D, and by firms that conduct R&D to reach external rather than exclusively domestic markets.
- Agglomeration and network economies offer learning and specialization opportunities due to greater firm density. This is an important factor in determining the likelihood of being an HGF. For example, Ethiopian plants located in or close to large urban centers have a greater opportunity of attaining high-growth status vis-à-vis the ones located farther away. In Thailand firms that are more connected with others via ownership networks are also more likely to experience high growth.
- External market linkages as measured by a firm’s exporting status, share of exporters or FDI recipients in a given location or sector, or imports of technology have contributed to high-growth patterns for firms in India, Hungary, Mexico, and Tunisia.
- Firms that pay higher wages have a greater likelihood of subsequently attaining high growth — reflecting the key role that human capital plays in firm performance. The contribution of founding managers and employees is found to be critical in determining future firm growth in Brazil.