Determinants of Survival of Newly Created SMEs in the Brazilian Manufacturing Industry: an Econometric Study

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 mac...

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...ctoral specialization and variation in size within-sector . The latter component can reflect scale economies, minimum efficient scale and entry barriers among other factors. The authors attempted to disentangle sectoral specialization and within-sector effects by means of two approaches with fixed-effect estimation and a shift-share analysis.

The most salient descriptive evidence revealed that relatively similar patterns of industry dynamics in terms of entry and exit appear to prevail across those countries. In particular, in the majority of the cases, about 20% of firms enter and exit most markets every year whereas about 20–40% of entering firms fail within the first 2 years of life. Even though, the referred study does not consider an econometric study as the undertaken in the present paper, its mostly descriptive results can provide some useful benchmarks.