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Firm Entry and Exit and Aggregate Growth

Staff Report 544 | Published February 13, 2019

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Authors

Jose Asturias Georgetown University Qatar

Sewon Hur Federal Reserve Bank of Cleveland

Kim J. Ruhl University of Wisconsin and National Bureau of Economic Research

Firm Entry and Exit and Aggregate Growth

Abstract

Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.