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Small Business Economics

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28-11-2018

Declining business dynamism in Belgium

Authors: Gert Bijnens, Jozef Konings

Published in: Small Business Economics | Issue 4/2020

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Abstract

Using 30 years of data from all for-profit firms incorporated in Belgium, we show that business dynamism and entrepreneurship have been declining over recent decades. This decline set in around the year 2000 following a decade of declining start-up rates. We also observe a decreasing share of young firms that become high-growth firms and more importantly a declining propensity for small (not necessarily young) firms to experience fast growth. Interestingly, a similar decline in business dynamism occurred in the USA, where firms face a far less rigid institutional environment than in Belgium. These remarkable similarities suggest that global trends rather than country-specific changes are at the basis of this evolution. We show evidence that points to the role of ICT intensity in explaining the secular decline in business dynamism.

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See for instance Haltiwanger et al. (2014) and Criscuolo et al. (2014).

IMD’s World Competitiveness Ranking (2015, 2016, 2017): USA (1st, 3rd, 4th) vs. Belgium (23rd, 22nd, 23rd); WEF’s Global Competitiveness Report (2016–2017): USA (3rd) vs. Belgium (17th), World Bank’s Ease of Doing Business (2017): USA (8th) vs. Belgium (42nd).

Growth rates between periods t and t − 1 are measured as the increase in the percentage of the employment at time t over the average employment at periods t and t − 1. See Section 3 for more details.

The role of firm heterogeneity has been exploited in recent work explaining fluctuations in GDP growth (Davis et al. 2006; Gabaix 2011; Acemoglu et al. 2012), unemployment (Moscarini and Postel-Vinay 2012), trade (Di Giovanni et al. 2014; Bernard et al. 2014), and aggregate (export) prices (Amiti et al. 2014).

See Reynolds et al. (2005).

Working based on unconsolidated accounts ensures that only Belgian activities and employment are taken into account. It does not allow, however, to distinguish between employment focused on the domestic market and employment linked with headquarter activity of MNCs or with export.

This includes both locally and foreign-owned firms incorporated in Belgium. Belgian annual accounts are not confidential and can be consulted at the NBB. Individual annual accounts of the past 10 years can be freely downloaded from the NBB website. Older annual accounts can be requested from the NBB at a fee. We have gathered the missing data while one of the authors was working as a research fellow at the NBB.

Financial institutions are not included in the dataset as they do not file standard annual accounts.

Small firms are defined as firms that do not exceed more than one of the following thresholds (1985 levels): average number of employees 50, turnover BEF 200 M (approx. €5M), and balance sheet total BEF 100 M (approx. €2.5M). Over the years, the monetary thresholds were gradually increased to €7.3M for turnover and €3.65M for balance sheet total (2014 levels).

This makes the result of our study not fully comparable with studies using establishment level data. The impact is expected to be limited. In 2014, 9128 FTE were employed at legal entities that disappeared due to “merger after acquisition”; this on a total job destruction rate of 147,450 FTE. In many cases, the acquiring company, in fact, keeps the legal entity of the target after changing the ownership.

To solve the 1996 change in definition, we calculate the 1995–1996 growth by comparing the average number of employees (which includes interim labor) in 1995 with the total number of employees at the end of 1996 (a reported variable) summed with the amount of interim labor in 1996 (reported separately). We annualize the growth rate as we assume this growth is over 1.5 years as it compares an average variable with an end-of-year variable. We come to an annualized growth rate of 0.64% for 1995–1996 aggregate employment in our dataset. This compares with a 0.69% growth rate for aggregate Belgian employment according to the Eurostat Labor Force Survey.

We do, however, exclude Belgium’s largest employer, the Belgian National Railway Company, from our data as, driven by EU regulation, it changes legal entity throughout the period. Since it represents approx. 4% of private sector employment, its observed entry and exit has a substantial impact on the employment weighted growth rate distribution.

The DHS growth rate expresses the percentage growth vs. the average size over the period as opposed to the conventional growth rate that expresses the percentage growth vs. the initial size of the period.

For example, a firm growing from 1 to 1.1 FTE has a DHS growth of 9.5% although only 0.1 FTE is added.

In Appendix 2, we also study dynamism based on the unweighted growth rate distribution and come to the same conclusions, i.e., a secular decline in dynamism.

Given the use of annual data, the Hodrick–Prescott smoothing parameter used is 100.

The universe of continuing firms excludes entering and exiting firms in a given year.

A recession is defined as two subsequent quarters of negative quarter-on-quarter real GDP growth. Real GDP growth figures from 1985 onwards taken from the OECD.

Young firms are defined as max. 5 years old.

In Belgium, a new business number is only given to a newly incorporated legal entity, with new shareholder capital. A new business number is not given when there is a change of shareholder nor location.

Geurts and Van Biesebroeck (2016) come to their findings based on entrants in the 2004–2012 period, and we assume the proportion of spurious entrants they find also holds for our time period 1985–2014.

See Haltiwanger et al. (2013) and Decker et al. (2016) for the USA, Criscuolo et al. (2014) and Calvino et al. (2015) for a broader set of OECD countries, and Geurts and Van Biesebroeck (2016) specifically for Belgium.

This finding is robust to using alternative measures of dynamism, including dynamism based on the unweighted employment growth rate distribution as well as the (unweighted) turnover growth rate distribution as shown in Appendix 2.

To maximize comparability, we use the variables average employment (# heads) before 1996 and end of year employment (# heads) from 1996 onwards. The dynamism and skewness calculations of the previous chapter use FTE from 1996 onwards. As a robustness check, we also study dynamism based on employment (# heads) after 1996 in Appendix 2 and come to the same conclusion, i.e., a decline in dynamism.

See, e.g., Geroski (1995) for an extensive overview of the empirical literature on firm entry. Specifically for Belgium, to our knowledge, there is only Sleuwaegen and Dehandschutter (1991) and De Backer and Sleuwaegen (2003) who study Belgian start-up rates during the 1980s and 1990s, but limit themselves to the manufacturing industry.

Before 1986, a single-person business could only be run by a self-employed person operating without a legal entity. Profits of a single-person business were taxed according to the (in most cases less favorable) personal income tax brackets. Furthermore, entrepreneurs without a legal entity remain personally liable for the business’ debts in case of bankruptcy.

A benefit remains that, since incorporation offers far higher protection in case of bankruptcy, incorporation should encourage risk taking which is positive for subsequent dynamism.

See Table 5 in Appendix 1. The top-5 sectors are retail trade (excl. motor vehicles) (NACE 47), wholesale trade (excl. motor vehicles) (NACE 46), specialized construction (NACE 43), food and beverage service (NACE 56), and wholesale and retail of motor vehicles (NACE 45). They represent 46% of start-up employment during 1986–1992.

High-impact firm definition: \( \left({\mathrm{Emp}}_t-{\mathrm{Emp}}_{t-3}\right)\left(\frac{{\mathrm{Emp}}_t}{{\mathrm{Emp}}_{t-3}}\right)\ge 25.15968 \) if Emp_t − 3 > 8

Also note that Belgium, contrary to the USA, did not experience a significant Internet boom and bust around 2000.

Note that this is in line with Goldschlag and Tabarrok (2018) who show that increased regulation (which is country specific) is not to blame for the decline of US business dynamism.

We have analyzed the different measures of dynamism for different industries based on Eurostat’s classification of high-tech vs. low-tech manufacturing industries and knowledge-intensive vs. less-knowledge-intensive services. This yielded little additional insight.

See Jäger (2017) for an explanation of the EU KLEMS project and its data sources.

Several 2-digit industries are taken together resulting in 29 different industries instead of the 88 NACE 2-digit industries.

Via this methodology, we categorize the following NACE sections or industries as ICT intensive (all other industries, we regard as non-ICT intensive): IT and other information services (62–63); telecommunications (61); publishing, audiovisual, and broadcasting activities (58–60); professional, scientific, technical administrative, and support service activities (M–N); financial and insurance activities (K); wholesale and retail trade (G); arts, entertainment, and recreation (R); machinery and equipment n.e.c. (28); chemicals and chemical products (20–21); coke and refined petroleum products (19); and electricity, gas, and water supply (D–E).

We do not specifically study the possible increased Belgian employment at Belgian MNCs driven by headquarter services delivered to non-Belgian affiliates. This increased employment does show up in the employment figures we use, but we have no information on whether these employees work specifically for the Belgian market of for the foreign market.

More recent research on linkages between FDI and entry/exit rates unfortunately focuses on developing and transitional economies.

This survey is conducted since 1997. Based on, among others, annual account data, the NBB selects the surveyed firms. Response to the FDI survey is mandatory if 10% of the firm’s equity is directly or indirectly held by a foreign entity or individual.

The within-firm volatility for the balanced panel of firms that are continuously active in the studied period is not shown but declines as well. This measure is filtered of all entry and exit activity.

Smaller NACE Rev. 2 2-digit industries are grouped together by EUKLEMS. EUKLEMS reclassifies older versions of industry classifications to NACE Rev. 2.

We also work based on unconsolidated accounts that reports turnover that includes intercompany turnover. This potentially leads to double counting of the same final turnover.

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Title: Declining business dynamism in Belgium
Authors: Gert Bijnens
Jozef Konings
Publication date: 28-11-2018
Publisher: Springer US
Published in: Small Business Economics / Issue 4/2020
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-018-0123-4

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