Firm lifecycles and evolution of industry productivity

How do new firms contribute to industry productivity growth at the time of entry and then subsequently over their lifecycle? We analyze this question using a lifecycle decomposition approach and Finnish business-level microdata. New entrants have a negative effect on industry productivity growth initially, but a prolonged process of market selection and exit during the early stages of the firms’ lifecycle mitigates this negative effect subsequently. The positive productivity contribution of market selection declines gradually, both because the failure rate decreases with age and also because the productivity gap between the exiting and surviving firms narrows. The most important source of industry productivity growth is, however, the average productivity growth of relatively old incumbents, i.e. their incremental renewal. Our lifecycle approach also provides novel viewpoints for policy.