Labor productivity response of the micro-and-small-firm sector to business entries and exits

Abstract

This article investigates whether differences in business entry and exit rates explain differences in average, municipality-level labor productivity in the micro- and small-firm (MSF) sector. We focus on the case of Chile, exploiting an exogenous source of variation to exit rates-an exceptional event when the tax authority closed tens of thousands of ostensibly inactive firms in 2003-to instrument metrics of business dynamism in regression models of labor productivity. Pooled and panel instrumental variable (IV) estimations confirm that even the sector comprising the smallest firms in a less developed country can raise its productivity in the face of increased competition, knowledge inflows, and the release of resources.