Economic complexity and firm dynamics: Evidence from European industries

Using country-sector data for 24 European countries from 2008 to 2019, we examine how economic complexity shapes firm dynamics. We study whether more complex productive structures foster entrepreneurship or instead act as a barrier to market entry, focusing on firm entry, exit, churn, and survival across size classes. To address endogeneity, we implement an instrumental variables strategy based on regional leave-one-out averages of the Economic Complexity Index (ECI). Our results suggest that higher economic complexity significantly reduces firm entry and business churn, and lowers medium- and long-term survival, particularly for larger firms. For microenterprises, the negative effects on longer-term survival are weaker, despite a stronger negative effect at entry. These findings suggest that economic complexity operates less as a broadly enabling entrepreneurial environment and more as a selective filter, with heterogeneous effects across firm sizes.