Companies grow at different rates in different countries, of course. Less obvious: what these differences in company growth rates can tell us about GDP per capita differences across countries. Recent research by Jahangir Alam suggests that there is quite a strong relationship between variation in firm growth and GDP growth.
In order to investigate the impact of company growth on the growth of a country’s economy, Alam looked at the company growth rates, as measured as changes in employee numbers, comparing 10-19 year-old companies with 20+ year-old companies based on their number of employees.
Company growth rates and economic growth are closely linked.
He found that the growth rate of the older group of companies could explain up to 16 percent of the variation in real GDP per capita across all countries. There could be several reasons for this. Alam suggests that a country’s company growth rate indicates the competitiveness of the market. In more competitive markets, he argues, inefficient companies are more likely to shut down and their resources are more likely to be re-distributed across more productive companies.
Focusing on the right group of companies will say a lot about the state of the economy.
The older cohort of companies did not always have higher growth rates than the younger one. Since the fastest growing companies in the economy are known to generate the most jobs, this could suggest that GDP per capita might be better predicted by zeroing in on the fastest growing companies in each country, regardless of age.
Further research could look for connections between GDP per capita and the growth rates of the fastest growing companies, or the percentage of companies that make it into the fastest growing category.
Contributed by Maha AbdelAzim.
Read the full paper called Differences in Firm Growth across Countries: Does it Explain GDP Differences? here.