Do Firms in Developing Countries Grow as They Age?

Abstract

We examine the relation between establishment size and age in the formal sector using survey data from 120 developing countries. Existing research suggests that manufacturing establishments in developing countries do not grow over time, most likely due to market imperfections and regulations. To the contrary, we find that the average plant in developing countries that is over 40 years old employs almost five times as many workers as the average plant five years or younger. We find consistent evidence when we look within a large country, India, using detailed manufacturing census data over 23 years. We also find that differences in financial development across Indian states, while substantial, have a minor effect on firm growth, consistent with inefficiency of state-owned financial systems. These results hold controlling for differences in labor regulations across states, capital intensity, labor regulations, and for firms born before and after the major reforms.

Keywords: Firm Growth, Financial Constraints, Firm Life-Cycle, Establishment Growth, Firm Size, Labor Regulations

JEL Classification: G39, L25, L88, O14, O17