Presentation by Felix Modrego, Assistant Professor, Institute of Social Sciences, Universidad de O’Higgins, Chile at the 17th OECD Spatial Productivity Lab webinar held on 14 September 2022. More info https://oe.cd/spl

1. Small firms churning and local
productivity in a less-developed
country
FÉLIX MODREGO, INSTITUTE OF SOCIAL SCIENCES, UNIVERSITY OF O’HIGGINS
17TH MEETING OF THE OECD-SPL
SEPTEMBER 14, 2022

2. Background
• Fondecyt Initiation in Research, project 11190112
• Regional conditions explaining the geography of growing early-stage businesses (GESB) in
a less-developed country, Chile
• Evidence of significant selection effects in agglomerations
• A more focused analysis of business turbulence and productivity of the micro
and small firms (MSF) sector*
*Modrego, F., & Foster, W. E. (2021). Labor productivity response of the micro-and-small-firm sector to business entries and exits. Journal of Small
Business Management, https://doi.org/10.1080/00472778.2021.1934852

3. Business dynamics and aggregate productivity
• Internal (firm-level) restructuring:
• Competition reducing organizational slack (e.g. Geroski, 1989)
• External (industry/economy-wide) restructuring:
• Entries introducing new information in the economy (e.g. Audretsch and Keilbach, 2004)
• Entries inducing exits and a reallocation of resources to more productive uses (e.g. Pe’er and Vertinski,
2008; Foster et. al, 2006)
• A lot of supporting evidence in the developed world (US, Europe)
• We tense the theory with a limiting case: the local micro and small firms sector in Chile

4. Municipal entry and exit rates and MSF sector average productivity
1
2
3
4
5
log
real
sales
per
worker
(MSF)
0 .2 .4 .6
entry rates
A
1
2
3
4
5
log
real
sales
per
worker
(MSF)
0 .1 .2 .3
exit rates
B
1
2
3
4
5
log
real
sales
per
worker
(MSF)
-.1 0 .1 .2 .3
net entry rates
C
0
.05
.1
.15
.2
.25
exit
rates
0 .1 .2 .3 .4
entry rates
D

5. Econometric findings
• Both greater entry and exit rates boost municipal average MSF sector productivity
• Effects of entries and exits which are more than proportional
• 1% increase in entry rates translates into an around 1.2% to 2% increase in average MSF sales per worker
• 1% increase in exit rates translates into an around 1% to 1.7% increase in average sales per worker
• Effects of net entry rates of a similar magnitude
• External restructuring effects are likely of greater importance (no way to confirm it with the data at hand)
• Even the sector of the smallest firms in a less-developed country can respond to competition raising its
productivity

6. Implications
• Exits is something we should not be afraid of, but a natural outcome of a dynamic entrepreneurial
ecosystem in developed, but also in less-developed countries such as Chile
• Entrepreneurship and small business support policies and programs are warranted also based on
aggregate small firms’ productivity considerations
• Initiatives easing bankruptcy procedures and re-entry programs may accelerate local business
dynamism, and thus enhance its productivity effects
• Also, entrepreneurial capacity building and small-firms support programs may help incumbents,
particularly small, to cope with competition and raise their productivity
• SME and entrepreneurship support programs should be designed and evaluated considering spillover
effects
• Need for better data in developing countries to disentangle the importance of internal and external
restructuring effects

7. Small firms churning and local
productivity in a less-developed
country
FÉLIX MODREGO, INSTITUTE OF SOCIAL SCIENCES, UNIVERSITY OF O’HIGGINS
17TH MEETING OF THE OECD-SPL
SEPTEMBER 14, 2022