Exit and Entry Dynamics of UK Firms Following the Global Financial Crisis

ABSTRACT In this paper, we investigate the dynamics of the United Kingdom entering and exiting firms in determining the long‐lasting drop in aggregate total factor productivity (TFP) following the Global Financial Crisis. This is done in an evidential way using a multilateral model that divides real‐value output by both a direct and a quantity index. Using micro‐level data sourced from Companies House in the United Kingdom, our results extend the literature in showing that the main factor driving the aggregate TFP decline is the within effect , which is the productivity decline in surviving firms. However, the entry and exit effects also significantly contribute to the long‐lasting drop in aggregate TFP. We find, exiting firms tend to have higher than average TFP. Furthermore, newly entering firms tend to have lower than average TFP. And, newly entering firms fail to increase their TFP levels over time, thereby depressing the within effect. We suggest that optimal policy decisions require evidence‐based analyses of how best to foster economic growth and firm productivity. Otherwise, governments risk repeating similar mistakes in allocating scarce resources to failing or zombie firms, while allowing high‐performing enterprises to leave the market.