Firm dynamics and productivity by age: evidence from Ireland

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.