Firm Creation and Economic Transitions

Virtually all industrial countries are experiencing some form of transformation in their economies, from the dramatic move from centrally planned to market economies in East-central Europe, to the rebuilding of the economies in the so-called Rust Belt of the USA, to the efforts by Asian countries to return to their recent high growth levels. The analysis builds on the work of Schumpeter, Hannan and Freeman, and Kornai to develop a picture of an economy as an evolutionary process in which the creation, survival and growth of firms is the key to continued growth. This entrepreneurial activity is vital to successful transformations at critical points when the existing enterprises are not well suited to market conditions - what Schumpeter refers to as creative destruction. This paper uses detailed data on the transitions in the Polish and Michigan economies to present evidence to support these propositions. Showing that the successful transformation of two economies with obvious historical differences both depended upon the creation of new firms rather than on the restructuring of existing firms shows that entrepreneurial activity is a universal necessity.