Firm dynamics and productivity by age—evidence from Ireland

Abstract The establishment and growth of new businesses are key ingredients for economic growth and job creation, but also productivity growth. This paper examines a panel of firms from both manufacturing and services sectors over a 13-year period to compare the relative productivity performance of entrants, exitors and incumbents in Ireland. We find evidence of catch-up in productivity levels of new entrants towards that of incumbents in both sectors within 5 years. Exitors meanwhile exhibit a decline in their performance in the years preceding exit. We then construct a decomposition of aggregate productivity growth that captures the channels through which these firms contribute to aggregate productivity, accounting for the differences by age. In manufacturing, exit has a negative impact on aggregate productivity over the period, with this driven by older firms. In services however exit has a positive relationship due to unproductive young firms leaving the market.