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Discussion of “What Determines
Entrepreneurial Outcomes in Emerging
Markets?
Role of Initial Conditions”
Miriam Bruhn
Finance and Development: The Unfinished Agenda
November 2, 2016
• Figure 1 shows a big
jump in employment for
large firms between age
1 and 2
• Much bigger jump than
for small firms
• Why this this not
reflected in the
employment growth
results?
• Growth before age 8
looks much higher than
in Hsieh and Klenow
(QJE 2014)
• What drives this
difference?
• Is India representative
of other countries?
• Small entrants have 16 employees at
age 1 and about 21 at age 2
• 5.4/16 = 31% increase
• Large entrants have 67 employees at
age 1 and about 98 at age 2
• 31/67 = 46% increase
• Both of these numbers are large
increases in one year!
• Selection effects, i.e. do the smallest
firms go out of business?
• In the US, about 20%
of firms go out of
business between age
1 and 2
• Average number of
employees is 7.5 at
age 1 and 9.4 at age 2
• 1.9/7.5 = 25% increase
Distribution tests
• Compare distribution at age 2 to distribution at age 8
Frequency
• No evidence that distribution at age 8 is truncated at lower end
• Distribution at age 8 is more dilated  Is this consistent with no difference in
growth rates for small and large firms?
• Do results change if comparing distributions at age 1 and age 8?
Number of employees
Findings on financial development
• Surprising that financial development does not matter for growth,
only for initial size
• Shouldn’t availability of finance allow firms to make more investments, which
would lead to growth?
• In financially developed states, entrants are smaller, but also more
numerous (as a % of total firms)
• What does this finding mean for economic development?
• Suggests that finance relaxes constraints, but at the same time we don’t see
an increase in small firms’ growth rates…
• What is the optimal firm size?