Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Ideas Matter

  • HOME
  • CATEGORIES
    • Behavioral Economics
    • Environment and Climate Change
    • Macroeconomics and Finance
    • Microeconomics and Competitiveness
    • Politics and Institutions
    • Social Issues
  • Authors
  • Spanish

Business Dynamism is on the Decline Globally

November 21, 2024 by João Ayres - Miguel Ángel Talamas Marcos Leave a Comment


Business dynamism occurs when new firms enter the market, existing firms expand, and less productive firms exit. But business dynamism is fading in many economies around the world, disrupting the process by which resources, such as labor and capital, are allocated efficiently in the economy.   

Much of the evidence for this can be seen in advanced economies, like that of the United States. But it is also happening in less developed regions as well, and is accompanied by other negative and related trends, such as slower productivity growth, rising market concentration and widening labor productivity gaps between companies.  

The question that policymakers now face is what potential measures can arrest this decline — with actions ranging potentially from those that stimulate knowledge sharing among businesses to anti-trust measures.

The Nature of Business Dynamism

Business dynamism helps drive global productivity growth. It allows resources to flow from less productive firms, which can be forced to exit the market, to more efficient, innovative ones. Dynamic markets foster innovation, efficiency, and economic resilience. Markets lacking dynamism risk stagnation, as declining firm entry and competition lead to reduced innovation and slower productivity gains.

The decline in business dynamism globally over the last two to three decades is well-documented, with a range of measures used to capture this trend. In the U.S., studies reveal a marked reduction in firm entry and job reallocation rates, and in firm growth dispersion (the difference of growth rates across firms).  Similar patterns have been observed in Europe, with decreasing business dynamism contributing to slower productivity growth. This decline in dynamism, combined with increasing market concentration, suggests that economies are becoming less adaptable. Fewer new firms are challenging incumbents. As a result, there is less competition, leading to potentially slower growth in the long term.

A similar pattern can be seen in Latin American countries. Figure 1, using data from the OECD DynEmp project, reveals different job reallocation and firm entry rates. Both Brazil and Costa Rica (in blue) are in the negative quadrant, with reductions in job reallocation and entry rates over the period 2000-2015, revealing overall how economies with larger slowdowns in job reallocation rates also have larger declines in the entry rates of firms.

Figure 1 – Variation in Job Reallocation and Entry Rates

Source: OECD DynEmp project

Causes of the Decline

Many researchers point to the growing market power of large firms as a key driver of the drop in business dynamism. Too much market power has led to less competitive markets, higher barriers to entry, reduced job reallocation, and greater price markups.  

Demographic shifts, particularly less growth in the labor force, have also been highlighted as a major factor. As populations grow more slowly, fewer firms enter the market, leading to a concentration of economic activity in larger, older firms. This, apart from increased market concentration, has led to larger average firm size, and a declining labor share of GDP. According to data from the OECD DynEmp project, demographic changes can explain the differences in firm entry rates across countries (Figure 2). But they do not explain very well the variation in entry rates over time (Figure 3), with other explanations possible.

Figure 2 – Firm Entry and Demographics

Source: OECD and OECD DynEmp project

Figure 3 – Variation in Working Age Population Growth and Entry Rates

Source: OECD and OECD DynEmp project

Technological advancements and globalization also have a significant influence.  Technologies like software and data-driven processes have enabled larger firms to scale more efficiently, reducing the role of smaller competitors. While globalization initially spurred competition, it has allowed larger firms to expand across markets more easily, crowding out smaller ones. Meanwhile, the declining spread of knowledge, due in part to weakened antitrust enforcement and strategic patenting by large firms, has slowed innovation.

Tackling the Problem

Amid these challenges, policymakers may have to take a multifaceted approach. Robust anti-trust enforcement is critical to preventing monopolistic practices. Equally important are any other regulations that prevent large firms from stifling competition and that promote the market entry of smaller firms.

Many existing regulations, such as occupational licensing and non-compete clauses, are counterproductive, impeding new firm entry and limiting new ideas and products. And many tax laws are inefficient and deter growth. Policymakers should seek reform in these areas as well.

Finally, policymakers could support initiatives that facilitate knowledge sharing among firms, including partnerships between large corporations and startups, and the creation of platforms that enable smaller firms to access valuable data and resources. Initiatives that provide access to funding and mentorship programs for startups and small businesses would similarly help foster innovation and entrepreneurship.   All these are but steps to address a highly complex problem. But the widespread decline in business dynamism threatens to have major implications for the economic trajectory of many regions of the world, and policymakers need to be aware of it and try to arrest it in the interests of greater fairness, innovation, and productivity growth.


Filed Under: Macroeconomics and Finance

João Ayres

É economista do Departamento de Pesquisa do BID. Seus interesses de pesquisa se concentram em economia internacional, macroeconomia e finanças públicas. Formado em economia pela Universidade de São Paulo, João tem mestrado e doutorado em economia pela Fundação Getúlio Vargas e doutorado em Economia pela Universidade de Minnesota.

Miguel Ángel Talamas Marcos

Miguel Ángel Talamas Marcos is an Economist at the Research Department. Miguel holds a Ph.D. in Managerial Economics and Strategy from the Kellogg School of Business at Northwestern University. His research focuses on firms and labor markets in developing countries. Before his doctoral studies, he worked in consulting for McKinsey & Company and Cornerstone Research.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Related posts

  • Unicorn Firms and Business Dynamism
  • When Worsening Credit Conditions Trigger Recessions
  • Where Productivity and Prosperity Meet
  • When an Excess of Small Firms Hurts Productivity
  • Five Things Policymakers Need to Know about Entrepreneurship in Latin America:

About this blog

The blog of the IDB's Research Department shares ideas that matter on public policy and development in Latin America and the Caribbean.

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

    Blog posts written by Bank employees:

    Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


    For blogs written by external parties:

    For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

    The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

    Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



    Privacy Policy

    Copyright © 2025 · Magazine Pro on Genesis Framework · WordPress · Log in

    Banco Interamericano de Desarrollo

    Aviso Legal

    Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

    facebook
    twitter
    youtube
    This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser.
    To learn more about cookies, click here
    X
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
    Non-necessary
    Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
    SAVE & ACCEPT