A World Bank economist show how to create the right jobs for a country

Job creation, or the lack of it, is the central political economy issue today. A World Bank team recently studied the impact high growth firms have on job creation and overall dynamism in 11 countries, including India.
Denis Medvedev, Lead Economist, speaks to
Sanjiv Shankaran about the findings.

Why did you choose to study high growth firms (HGF)?
We don’t want to look at growth in general as there is a lot of dispersion there. We want to look at high performers. The other point is there is so much interest out there. We are talking about start-ups, building incubators, all those things that are targeted at firms that have high potential. With this book we wanted to look at what evidence shows.

How much should public policy target winners? How much does it matter if you have a lot of high growth firms? What are your findings on job creation?

We find a share of HGFs in the economy – somewhere between 3% and 20% – contributes to the majority of new jobs. Many times these firms are the only firms in the economy adding new jobs.

But HGFs seem to have only a temporary impact. Why?

One way to look at it is from an economist’s perspective. Joseph Schumpeter talked about creative destruction. You have new ideas coming in, new firms, and those ideas run their course. Then somebody else comes in and they bring a new idea. What we see as a manifestation of HGF is essentially an outcome of that process.

There’s another way to think about it. As long as companies are able to bring new ideas, to link with other firms, to invest in their managerial capabilities, that can manifest in high growth. But this idea that a company would stay the way it is and continue growing forever is not something we see. So, we talk about differentiation between HGFs and high growth episodes. Firms go through these episodes. What is important is thinking about how much these episodes contribute to the dynamism and what is it that enables these episodes.

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Doesn’t the private sector also struggle to figure out the underlying cause of these episodes? Picking a winner is tough.

Majority of investments even venture capitalists make would be terminated at a loss. That leads us to two questions for policy makers.

One, how much do policy makers want to think about targeting if we have this evidence that even what professional investors do doesn’t always lead to success. It may indeed be random. Second, are the principles guiding a policy maker the same as the principles guiding a private investor? If I am a private investor, I may not care about growth in jobs.

For a public policy maker it matters where you put public resources. Are you investing in companies that over the long term are going to raise economy wide productivity, (and) are going to be reducing distortions?

What would you suggest for policy makers?

Policy makers should focus less on either trying to support existing winners or try to find new potential winners. At the very least if they were to look at policies like that, ensure that they start at small scale and have very strong monitoring. Maybe they want to start something new and maybe it could work. But start small, use pilots.

More broadly, reinforce factors which can lead to high growth. First is allocative efficiency, making sure firms are able to access the resources they need. Second, is business-to-business connection, that is, connecting firms to each other and markets, happening? Third is building firm capability. Improving managerial quality of firms, helping firms innovate.

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Do you advocate looking at the overall environment?

The key distinction is targeting behaviour, targeting things firms do as opposed to targeting what firms look like. Some policies look at outward characteristics like firm size, sector, and policy makers try to zero in on those. The danger is you associate outward characteristic with performance. What actually matters is deeper drivers. Our idea is for policy makers to invest in these drivers rather than outward characteristics. What kind of policies can I put in place to help firms innovate? They can be financial incentives, in-kind support, (and) a regulatory environment.

What would you recommend for India?

This report draws conclusions globally. For India, we understand there’s been a lot of progress on improving allocative efficiencies. For many policy makers the next frontier is some of the capabilities which are internal to the firm, like management, for instance. There is a well-known study by Nick Bloom and colleagues which has found that for even medium to large sized firms the quality of management can oftentimes be poor. But very simple things can make long lasting differences in productivity. Starting to think more about how we can help firms improve their own capabilities is an agenda that globally is getting more attention and empirical traction.


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