High-growth firms in emerging economies account for more than 50 per cent of all new jobs and sales despite making up less than 20 per cent of all firms in manufacturing and services. These firms create a domino effect on others through increased demand and/or offering improved access to inputs.
A new World Bank Group report, High-Growth Firms: Facts, Fiction, and Policy Options for Emerging Economies acknowledges that the extraordinary capabilities of high-growth firms have attracted the interest of policy makers who are keen to figure out how to encourage the establishment of more of these high-performing firms to boost economic performance. The report is based on a detailed analysis of firm dynamics in a number of emerging markets, including Hungary.
According to the report’s analysis, the link between productivity and high growth is often weak; as firms may grow for a variety of reasons beyond technical efficiency. The report reveals that, in many instances, high growth episodes are tough to sustain and difficult to predict. Policies designed to improve firm dynamism and support job creation need to steer away from a selective focus on potential winners. Instead, they should support what the report calls the ABCs of growth entrepreneurship: improving allocative efficiency, strengthening business-to-business spillovers, and building firm Capabilities.
“In many countries, growth models that may have been successful in the past need to accommodate new challenges and support job creation,” said Ceyla Pazarbasioglu, World Bank vice president for equitable growth, finance and institutions. “We are working with client countries to support policy interventions that are tailored to the challenges and capabilities of firms and entrepreneurs. For many public-sector institutions, the capacity to implement such policies relies on their ability to facilitate innovation, productivity, and firm growth while monitoring and adopting global good practices.”
According to the report, most high-growth firms in developing countries are spread across a variety of sectors and regions and the majority began as a medium or large company. The report therefore recommends that public policies aimed at facilitating firm dynamism and growth do not overemphasize size, sector, technology content or location as selection criteria for policy interventions.
The report also recommends improving the quality and accessibility of firm-level data, expanding the use and scope of policy evaluation, while strengthening institutional capabilities to support entrepreneurship; all of which are key priorities for the effective implementation of high-growth policies.
“Sustaining high growth is a challenge for most firms. Central to the report’s findings is a recognition of the importance of innovation, global linkages, networks, good managerial practices, and access to finance in enabling high-growth episodes,” said Najy Benhassine, World Bank director, finance, competitiveness and innovation. “The report debunks myths about high growth being associated with particular sectors and whether a firm is high-tech and/or a startup. A stronger focus on evidence-based policies to facilitate these channels is likely to pay off greater dividends in terms of productivity and firm growth than often-futile searches for ‘the next unicorn’,” he added.