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High-Growth Firms: Facts, Fiction, and Policy Options for Emerging Economies

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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.

World Bank

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Russia Among Global Top Ten Improvers for Progress Made in Health and Education

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Russia is among the top ten countries globally for improvements to human capital development over the last decade, according to the latest update of the World Bank’s Human Capital Index (HCI).

The 2020 Human Capital Index includes health and education data for 174 countries covering 98 percent of the world’s population up to March 2020.

Russia’s improvements were largely in health, reflected in better child and adult survival rates and reduced stunting. Across the Europe and Central Asia region, Russia, along with Azerbaijan, Albania, Montenegro, and Poland, also made the largest gains in increasing expected years of schooling – mainly due to improvements in secondary school and pre-primary enrollments. The report also shows that over the last 10 years Russia has seen a reduction in adult mortality rates. However, absolute values of this indicator remain high in the country with this progress now at risk due to the global Covid-19 pandemic.

Human capital contributes greatly to improving of economic growth in every country. Investments in knowledge and health that people accumulate during their lives are of paramount concern to governments around the world. Russia is among the top improvers globally in the Index. However, challenges persist and much needs to be done to improve the absolute values of Index indicators,” said Renaud Seligmann, the World Bank Country Director in Russia.

The HCI, first launched in 2018, looks at a child’s trajectory, from birth to age 18, on such critical metrics as child survival (birth to age 5); expected years of primary and secondary education adjusted for quality; child stunting; and adult survival rates. HCI 2020, based on data up to March of this year, provides a crucial pre-pandemic baseline that can help inform health and education policies and investments for the post-pandemic recovery.

Of the 48 countries in Europe and Central Asia included in the 2020 Human Capital Index (HCI), 33 are among the upper-third in the world, and almost all are in the top half. However, there are significant variations within the region.

In Russia, a child born today can expect to achieve 68 percent of the productivity of a fully educated adult in optimal health. It is at the average level for Europe and Central Asia countries and the third result globally among the countries of the same income group. There is a stark contrast between education and health subscales in Russia. While the education outcomes of the country are high and outperform many high-income peers, its health outcomes are below the global average.

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Accelerating Mongolia’s Development Requires a Shift “from Mines to Minds”

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A new report by the World Bank estimates that out of every dollar in mineral revenues Mongolia has generated over the past 20 years, only one cent has been saved for future generations. The report argues that to break this cycle, Mongolia should use its mineral wealth to invest in people and institutions, while gradually reducing its dependence on the sector.

This is particularly true as demand for key minerals is likely to tumble due to climate change concerns, a shift of investors’ preference toward sustainability, China’s ambitious goal to reduce coal consumption, and persistence of the COVID-19 shock, according to Mongolia’s Mines and Minds, the World Bank’s September 2020 Country Economic Memorandum for Mongolia.

Since the advent of large-scale mining in 2004, Mongolia’s economy has grown at an average rate of 7.2 percent per year, making it one of the fastest-growing economies in the world. Growth has translated to rapid decline – although at times partly reversed – in the incidence of poverty and improved quality of life. The report also notes that Mongolia enjoys relatively strong human capital, and its infrastructure capital has improved for the last few decades, though remains scarce given the size of the country and low population density. This performance has been made partly possible through a generous but inefficient social assistance system and a large public investment program supported by mineral revenues and external borrowing.

However, a number of enduring challenges have grown in the shadow of this success. Mongolia’s rapid growth has been obscured by its extreme macroeconomic volatility and frequent boom and bust cycles. Growth has almost entirely come through capital accumulation and the intensive use of natural capital rather than through sustained productivity growth. Meanwhile, the country has not only consumed almost all its mineral outputs, but has also borrowed heavily against them, bequeathing negative wealth to the next generation.

Instead of maximizing the benefits of its mineral wealth for diversified and inclusive growth, Mongolia has increasingly become more addicted to it. At the same time, human capital has been underutilized and institutional capital has eroded.” said Andrei Mikhnev, World Bank Country Manager for Mongolia. “Such inability to capitalize on the country’s endowments has resulted in limited diversification of outputs and exports and has further amplified its vulnerability to the swings of the global commodity markets. Breaking this gridlock calls for a fundamental shift in approach that puts investing in minds on an equal footing with mines.”

The report recommends key policy actions to build the foundation of a diversified and sustainably growing  economy. These include:

  • Implement countercyclical fiscal and monetary policies – supported through transparent fiscal rules, an independent fiscal council, a market-driven exchange rate, and a well-functioning stabilization fund – to smooth consumption over the business cycle rather than maximize current consumption.
  • Undertake bold investment climate reforms to enhance competition, secure investor rights, and create a more level playing field that enables productive firms to invest and grow.
  • Move away from the mindset of diversifying products to expanding endowments, especially in terms of better utilization of Mongolia’s young and educated, especially female, labor force.
  • Accelerate the implementation of fundamental governance reforms (especially on the government effectiveness and control of corruption) to reduce political interference, increase transparency, and improve regulatory quality throughout the economy.

“Fortunately, there are many encouraging signs of improved macroeconomic management in 2017-19, providing the new government an opportunity to advance its reform efforts,” said Jean-Pascal Nganou, World Bank Senior Country Economist and lead author of the report. “Some impressive fiscal outcomes were achieved not by introducing new reforms but by effectively implementing existing ones. They demonstrate that with the right political will and leadership, similar improvements are possible in other areas including monetary and exchange rate policy, the financial sector, the business environment, and the labor market. The new administration has, therefore, an opportunity to institutionalize these reforms and avoid policy regression in the future.”

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Nearly 9 in 10 People Globally Want a More Sustainable and Equitable World Post COVID-19

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In a new World Economic Forum-Ipsos survey of more than 21,000 adults from 28 countries nearly nine in ten say they are ready for their life and the world to change.

72% would like their own lives to change significantly and 86% want the world to become more sustainable and equitable, rather than going back to how it was before the COVID-19 crisis started. In all countries, those who share this view outnumber those who don’t by a very significant margin (more than 50 percentage points in every country except South Korea). Preference for the world to change in a more sustainable and equitable manner is most prevalent across the Latin America and Middle East-Africa regions as well as in Russia and Malaysia.

Next week’s World Economic Forum Sustainable Development Impact Summit will address the achievement of the sustainable development goals and the appetite for transformation which will drive the “decade of delivery”.

Clear majority ready for a more sustainable and equitable world

Globally, 86% of all adults surveyed agree that, “I want the world to change significantly and become more sustainable and equitable rather than returning to how it was before the COVID-19”. Of those, 46% strongly agree and 41% somewhat agree, while 14% disagree (10% somewhat and 4% strongly).

Russia and Colombia top the list of countries that strongly or somewhat agree with that statement at 94%. They are followed by Peru (93%) Mexico (93%) Chile (93%) Malaysia (92%), South Africa (91%) Argentina (90%) and Saudi Arabia (89%). The countries that are most change averse – disagreeing somewhat or strongly disagreeing with the statement – are South Korea (27%), Germany (22%), Netherlands (21%), US (21%) and Japan (18%).

Dominic Waughray, Managing Director, at the World Economic Forum said, “The Great Reset is the task of overhauling our global systems to become more equitable and sustainable, and it is more urgent than ever as COVID-19 has exposed the world’s critical vulnerabilities. But the technology to transform things tends to outpace the human will to change. In six months, the pandemic has systematically broken down this cultural barrier and we are now at a pivot point where we can use the social momentum of this crisis to avert the next one.”

Ready for significant personal change

Across all 28 countries, 72% want their lives to change significantly rather than returning to what it was like before the COVID-19 crisis (30% strongly and 41% somewhat) while the other 29% disagree (21% strongly and 8% somewhat).

Latin America stands out for its optimism, with Mexico, Colombia and Peru in the top five countries strongly or somewhat agreeing. Agreement is also high South Africa (86%), Saudi Arabia (86%, Malaysia (86%) and India (85%). By contrast, at least two out of five adults in the Netherlands, Germany, South Korea, Japan, Sweden, the US, UK and Canada long for their life to just return to how it was before the pandemic.

MethodologyThese are the results of a 28-country survey conducted by Ipsos on its Global Advisor online platform. Ipsos interviewed a total of 21,104 adults aged 18-74 in United States, Canada, Malaysia, South Africa, and Turkey, and 16-74 in 23 other countries between August 21 and September 4, 2020. Where results do not sum to 100 or the ‘difference’ appears to be +/-1 more/less than the actual, this may be due to rounding, multiple responses or the exclusion of don’t knows or not stated responses.

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