SATU NURMI: ESSAYS ON PLANT SIZE, EMPLOYMENT DYNAMICS AND SURVIVAL DYNAMICS ON PLANT SIZE, EMPLOYMENT NURMI: ESSAYS SATU Satu Nurmi ESSAYS ON PLANT SIZE, EMPLOYMENT DYNAMICS AND SURVIVAL A-230 ISSN 1237-556X HELSINKI SCHOOL OF ECONOMICS ISBN 951-791-829-1 2004 ACTA UNIVERSITATIS OECONOMICAE HELSINGIENSIS A-230 Satu Nurmi ESSAYS ON PLANT SIZE, EMPLOYMENT DYNAMICS AND SURVIVAL HELSINKI SCHOOL OF ECONOMICS ACTA UNIVERSITATIS OECONOMICAE HELSINGIENSIS A-230 © Satu Nurmi and Helsinki School of Economics ISSN 1237-556X ISBN 951-791-829-1 ISBN 951-791-830-5 (Electronic dissertation) Helsinki School of Economics - HeSE print 2004 To my parents Acknowledgements This thesis was mainly carried out during my research assistant position at the Center for Doctoral Program at the Helsinki School of Economics (HSE) between September 1999 and July 2003. I would like to express my special thanks to Anu Bask, Timo Saarinen, Margareta Soismaa and Maija-Liisa Yläoutinen for providing a supportive, inspiring and ßexible working environment. The empirical analysis would not have been possible without access to the micro- level data sources in the premises of Statistics Finland. I have beneÞted greatly from the cooperation with the Business Structures Unit and the Research Laboratory. I am grateful to Kaija Hovi and Heli Jeskanen-Sundström for facilitating the use of these important data sources for research purposes. I would also like to thank Heikki Pihlaja, Ritva Wuoristo and other staff at Statistics Finland for their advice and collaboration. I would like to express my sincerest gratitude to my supervisor, Pekka Ilmakunnas, who encouraged me to consider a career as a researcher after Þnishing my master’s studies. He has guided me through the whole process by sharing with me a great number of valuable ideas, comments and suggestions. I would also like to thank Mika Maliranta for all the creative suggestions on, for example, the analysis of productivity, job and worker ßows and plant demographics. His expertise concerning the econometric and empirical analysis, software and the data sources has been of vital importance. I am very grateful to the pre-examiners Martin Carree and José Mata for their in- sightful comments and suggestions. In addition, I wish to thank Juuso Välimäki for all his help with the theoretical part. I have also greatly beneÞted from the valuable comments and suggestions of, among others, John Ermisch, Pertti Haaparanta, Almas Heshmati, Ari Hyytinen, Stephen Jenkins, Tomi Kyyrä, Cheti Nicoletti, Leif Nordberg, Hannu Piekkola, Pierre Regibeau, Otto Toivanen and various seminar and conference participants over the years. I am grateful to Kluwer Academic Publishers for the per- mission to include the published article in section III. Furthermore, I wish to thank the editor and the two referees of the Small Business Economics for their helpful comments. Financial support from the Academy of Finland, projects 49153 and 50950, and from the Ministry of Labour, through the Labour Economics Research Program at the HSE, is gratefully acknowledged. I would also like to thank the HSE Foundation for travel grants. In addition, I am very grateful for the EU Marie Curie Association and the Institute for Social and Economic Research for the opportunity to visit the University of Essex, UK. Liisa Roponen has checked the language of the thesis. Finally, I reserve my warmest thanks to my husband Timo for all his support, en- thusiasm and positive spirits through this process. Furthermore, I sincerely thank my parents, sister, other relatives and friends for their encouragement and empathy during my studies. Helsinki, February 2004 Satu Nurmi Abstract This thesis consists of a theoretical introduction and four empirical essays which examine the effect of plant size on its employment dynamics and the likelihood of survival. Furthermore, the thesis investigates various industry-level and regional characteristics that have an impact on the choice of plant start-up scale. In addition to plant size, the focus of interest is on the effect of plant age and human capital on employment patterns. The data sets used also make it possible to analyse the plant-level consequences of the exceptionally deep recession experienced in Finland at the beginning of the 1990s. The primary data source used is a plant-level panel data set which is based on the Industrial Statistics of Statistics Finland over the period 1980—94 covering in principle all Finnish manufacturing plants with at least Þve employees. In some parts the analysis is also extended to cover service-sector plants with the data from the Business Register of Statistics Finland. In addition, it is possible to use linked employer-employee data sets, which include information on worker ßows and background characteristics of employees in each plant based on the Employment Statistics of Statistics Finland. According to the results, the choice of plant start-up size is affected by various industry attributes, which may differ depending on whether a plant belongs to a multi- unit or a single-unit Þrm. There are no signiÞcant differences between the Þndings for manufacturing and services except for the different role of regional employee character- istics in the choice of start-up size. The Þndings indicate that small plants create and destroy relatively more jobs than their employment share would imply. In addition, there is a negative relationship between plant size and relative employment growth, in other words small plants grow relatively faster than the larger ones. The results also suggest that young plants have faster relative growth than the older ones. However, the methods of study have a considerable effect on the results. Furthermore, assessing the total welfare effect is difficult, because differences in the qualitative factors between the jobs created in different-sized plants should be taken into account. It is also found that current size predicts the likelihood of plant survival better than initial size, so that smaller plants have clearly lower chances of survival. According to the Þndings, small and young plants seem to have been most severely hit by the negative consequences of the recession. However, the macroeconomic effects do not alter the central Þndings on the relationships between plant size, growth and survival. The Þndings lend support to the predictions of newer theoretical Þrm growth models, which describe the post-entry process of learning and adaptation that eliminates the less efficient units from the markets. The start-up scale of new plants is affected, for example, by the sunk costs and optimal size in the industry. Small new plants have a high risk of failure. However, those that are able to survive grow fast. The variance of growth decreases and the likelihood of survival increases with plant size and age through a process of learning. In addition, the Þndings show that the effects of human capital on Þrm growth and survival would deserve more attention both in the theoretical and empirical literature. Keywords: plant size, employment, growth, survival, human capital, manufacturing Tiivistelmä Tämä tutkimus koostuu teoreettisesta johdannosta ja neljästä empiirisestä esseestä, joissa tarkastellaan toimipaikan koon vaikutusta sen työllisyysdynamiikkaan ja hen- kiinjäämisen todennäköisyyteen. Lisäksi tarkastellaan toimipaikan aloituskokoon vaikut- tavia toimiala- ja aluetason tekijöitä. Toimipaikan koon lisäksi erityisenä kiinnostuk- sen kohteena ovat toimipaikan iän ja inhimillisen pääoman vaikutukset työllisyyskehi- tykseen. Aineisto mahdollistaa myös 1990-luvun alun lamavuosien toimipaikkatason seurausten analysoinnin. Ensisijaisena tutkimusaineistona on Tilastokeskuksen Teolli- suustilastoon perustuva toimipaikkatason paneeliaineisto vuosilta 1980—94, joka kattaa periaatteessa kaikki suomalaiset vähintään viiden henkilön teolliset toimipaikat. Joil- takin osin analyysiä laajennetaan myös palvelusektorin toimipaikkoihin Tilastokeskuk- sen Yritysrekisterin avulla. Tutkimuksessa käytetään myös yhdistettyjä työnantaja— työntekijä-aineistoja, jotka sisältävät tietoa kunkin toimipaikan työntekijävirroista ja henkilöstön taustaominaisuuksista Tilastokeskuksen Työssäkäyntitilastosta. Tulokset osoittavat, että toimipaikan aloituskoon valintaan vaikuttavat useat toimi- alakohtaiset tekijät, joiden vaikutus riippuu myös siitä kuuluuko toimipaikka moni- vai yksitoimipaikkaiseen yritykseen. Teollisuuden ja palvelualojen tulosten välillä ei ole merkittävää eroa lukuun ottamatta alueellisten työvoimaominaisuuksien erilaista merkitystä aloituskoon valinnassa. Tulosten mukaan pienet toimipaikat luovat ja hävit- tävät työpaikkoja työvoimaosuuteensa nähden suhteellisesti enemmän kuin suuret toimi- paikat. Lisäksi toimipaikan koon ja työllisyyden suhteellisen kasvun välillä on negatiivi- nen suhde, toisin sanoen pienet toimipaikat kasvavat suuria suhteellisesti nopeammin. Tulokset osoittavat myös, että nuorilla toimipaikoilla on vanhoja nopeampi suhteellinen kasvu. Tutkimusmenetelmillä on kuitenkin huomattava vaikutus tuloksiin. Kokonais- valtaisten hyvinvointivaikutusten arviointi on vaikeaa, koska erot erikokoisten toimi- paikkojen luomien työpaikkojen laadullisissa tekijöissä tulisi myös ottaa huomioon. Tu- lokset osoittavat myös, että nykyinen koko ennustaa toimipaikkojen henkiinjäämistä aloituskokoa paremmin siten, että pienillä toimipaikoilla on selvästi alhaisempi hen- kiinjäämisen todennäköisyys. Tulosten mukaan lamavuosien negatiiviset vaikutukset kohdistuivat erityisesti pieniin ja nuoriin