Creative destruction and transition: The effects of firm entry and exit on productivity growth in Estonia

This paper presents one of the first studies of firm demographics in Estonia, focusing particularly on the processes of firm entry and exit as well as survival analysis of new firms. Also, decompositions of productivity change into components consisting of resource reallocation, firm entry and exit, and productivity growth within continuing firms are carried out. The results, derived from a novel database of Estonian firms, show that firm turnover has been rather high in Estonia during the observed period from 1995 to 2001, resulting from low institutional entry barriers and the emergence of the SME sector. The high survival rates for new firms and the surviving firms' relatively fast growth could reflect their relatively high productivity compared to incumbent firms and changes in the sectoral structure of the economy. The decomposition of productivity change shows that the high productivity growth has been mostly from intra-firm productivity growth (e.g. the adoption of new production technologies and organisational changes), but the reallocation of production factors (especially the exit of low productivity units) has played an important role as well.