Job Creation in Colombia Versus the USA: ‘Up-or-out Dynamics’ Meet ‘The Life Cycle of Plants’

Abstract

One of the most striking contrasts between the anatomies of the business sectors in higher- versus lower-income economies is the overwhelming dominance of very small production units in the latter. Contrasting manufacturing sector data for Colombia and the USA, we show that weaker ‘up-or-out’ dynamics are behind this pattern and behind weaker average lifecycle growth. Dampened growth dynamics, not only in terms of upward mobility but also for exit and downward mobility, characterize both micro-establishments and young establishments in Colombia relative to their US counterparts. These patterns lead to a more dominant role of small older businesses in accounting for employment. Since dynamic selection among startups is a crucial driver of productivity growth in the USA, our findings point to a shortage of high-growth entrepreneurship and a relative high likelihood of long-run survival for small, likely unproductive plants, as two key elements at the heart of the development problem. We also show that analysis of establishment lifecycle dynamics based solely on cross-sectional data substantially underestimates lifecycle growth.