The potential role of smaller firms in employment creation is the most noticeable motivation for the recurring interest on that segment which has prompted the investigation of the factors that affect firm survival for that size class. The empirical literature, focused on developed countries, and has triggered controversies associated with size measurement and estimation issues [see e.g. Davis et al. (1996) and Davidsson et al.(1998)]. Evidence seems to indicate, as expected, that the net job creation effect is likely to be stronger in service industries. Nevertheless, more recent studies provide appealing evidence on particularly high net job creation by small firms also in the context of the manufacturing industry as suggested by Hijzen et al. (2010) and Neumark et al. (2011). Indeed, besides the job creation aspect, a well-known stylized fact refers to the large mortality of smaller firms a few years after start-up [see Bartelsman et al. (2005)].
In this regard, this paper considers the survival of small and medium enterprises-SMEs in the Brazilian manufacturing industry. The contributions of the present study reflect two main aspects:
(a) The literature and the available evidence on SMEs have focused on developed countries. Exceptions include the descriptive study by Najberg et al. (2000) which shows an important employment impact by smaller firms in Brazil over the 1995-97 period and the growth patterns of small firms located in southern Africa as studied by McPherson (1996). However, substantial mortality seems to prevail for that segment. Therefore, the study of firm-survival in a large emerging economy like Brazil -- characterized by the co-existence of modern and traditional sectors -- may be of interest. In fact, the macroeconomic stabilization after 1994 greatly reduced economic uncertainty and the lessening of institutional obstacles for firm creation since the 2000s appears to show a more favourable business environment. Moreover, simplified tax procedures were implemented for small businesses in the recent past;
(b) Most of the previous studies on survival make use of a cross section of entrants’ data and derive the survival pattern using fixed covariates. Exceptions include panel data studies like those of Esteve-Pérez et al. (2004, 2008). The latter focuses on the export-related survival of SMEs in Spain and explicitly controls for unobserved heterogeneity. In fact, the econometric approach closely relates to the one considered in this paper, but a gap in studies for developing countries still prevails.
The remainder of the paper is organized as follows. In section 2.1 we introduce a brief review of the relevant literature. Section 2.2 will deal with methodological aspects of our exercise including the relevant econometric issues involved. Section 3 contains the promised application to Brazilian data, and section 4 will offer final comments.
2. Firm survival: theoretical aspects
2.1 – A brief review of the literature