Summary of How Does Business Dynamism Link to Productivity Growth?

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Economist Huiyu Li examines whether the current slowdown in productivity, beginning shortly before the 2008 financial crisis, is linked to the long-run and ongoing decline in business shutdowns and inceptions in the United States. Li suggests that officials crafting economic policy need to better understand whether the animal spirits of entrepreneurship are truly a defining element of long-term productivity growth and subsequent economic expansion, or if there are alternative explanations. getAbstract recommends this concise and engaging report to executives, business owners and policy experts interested in analyzing the relationships among business formation, productivity and economic growth. 

In this summary, you will learn

  • What the declining rate of business formation means for total factor productivity (TFP) and
  • Why existing businesses might hold the answer to TFP growth.
 

About the Author

Huiyu Li is an economist at the Federal Reserve Bank of San Francisco.

 

Summary

Economists examine the relationship between business closures and new business start-ups as a signal of the overall vibrancy of the US economy. Yet, since the late 1970s, business turnover has lagged significantly. According to conventional economic theory, entrepreneurial start-ups drive innovation, bring new products and services to market, and increase efficiencies in processes and operations. The constant churn of new companies opening and old ones closing – one of many ways to measure “business dynamism” – generates productivity growth and, as a result, stronger economic expansion. Therefore, a steep drop in turnover would seem to herald bad news for the economy.

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    Ashish Agarwal 2 weeks ago
    Isn't it akin to saying that the perpetrator of the crime is the best healer?

    The author fails to point out what has changed in the existing businesses' practices to lead her to put her faith for a durable future growth in the same businesses that lead us to the great recession in the first place?

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