August 10, 2021

The contribution of business dynamics to productivity growth in the Netherlands

This paper analyses the declining firm dynamism in the Netherlands, which may explain part of the slowdown in productivity growth. We use a rich microdata set including nearly all corporations in the Netherlands during 2006-2016, which enables us to evaluate the TFP growth contributions of exiting firms, start-ups and new firms resulting from mergers & acquisitions in different industries. We use a Melitz and Polanec (2015) decomposition to assess TFP growth contributions.

We find that in service industries, start-ups, new firms created by M&As and exiting firms all contribute to overall TFP growth, in line with the creative destruction hypothesis. In manufacturing industries, TFP growth is driven mostly by incumbent firms. Here, entry and exit dynamics contribute relatively little or even negatively to TFP growth. In addition, young firms in the manufacturing industries tend to have higher TFP growth than older firms, while in service industries this is not the case. Finally, in general, relatively low productivity entrants are more likely to exit in the first five years after entry, which is in line with an `up-or-out' dynamic.