What Makes Small Firms Grow? Finance, Human Capital, Technical Assistance, and the Business Environment in Romania

Authors

J. David Brown, Heriot-Watt UniversityFollow
John S. Earle, W.E. Upjohn Institute for Employment Research
Dana Lup, Central European University

Series

Upjohn Institute Working Paper No. 03-94

**Published Version**

In Economic Development and Cultural Change 54(1): [33]-70

DOI

10.17848/wp03-94

Issue Date

June 2004

Abstract

Although the development of a new private sector is generally considered crucial to economic transition, there has been relatively little empirical research on the determinants of startup firm growth. This paper uses panel data techniques to analyze a survey of 297 new small enterprises in Romania containing detailed information from the startup date through 2001. We find strong evidence that access to external credit increases the growth of both employment and sales. Taxes appear to constrain growth. The data suggest that entrepreneurial skills have little independent effect on growth, once demand conditions are taken into account. The evidence for the effectiveness of technical assistance is weak: only assistance provided by foreign partners yields a positive effect. A wide variety of alternative measures of the business environment (contract enforcement, property rights, and corruption) are tested, but none are found to have any clear association with firm growth.

Sponsorship

Financially supported by U.S. Agency for International Development (USAID) and European Commission's Poland and Hungary: Aid for Restructuring of the Economies (PHARE) Action for Cooperation in Economics (ACE). The research for this paper was funded in part through U.S. Dept. of State Grant Number S-LMAQM-00-H-0146 and administered by the William Davidson Institute.

Subject Areas

INTERNATIONAL ISSUES; International labor comparisons; Transition economies; ECONOMIC DEVELOPMENT; Regional policy and planning; Business and tax incentives