RENEW Strategies

High-Growth Firms in Emerging Markets

alt text
Erin O'Connor
| February 5, 2019


At the end of 2018, the World Bank Group released a new report, High Growth Firms: Fact, Fiction and Policy Options for Emerging Economies, which looked at the qualities and characteristics of high-growth firms (HGFs) in a number of developing countries. The report’s goal was to discover the characteristics of HGFs, determine the best way to tell when a company is hitting a high-growth phase, understand the drivers that bring companies to this phase, and determine how policy makers and development partners can use this information to better finance potential HGFs. The report focused specifically on countries considered to have an emerging economy. With this focus, it shines light on what policies are needed to help bolster these economies and to help sustain growth of HGFs.

One of the major findings of the report was that HGFs are an important part of both job and economic growth for a country. On average, HGFs make up between 3-20% of manufacturing and service firms in the countries studied, but they create over half of the new jobs in the given country.

The report also illustrates that there are several common misconceptions about HGFs. When people typically think of an HGF, they usually picture a start-up in the tech sector which grows rapidly over a period of time, usually due to a quality inherent to the firm (such as a new tech advancement). Viewing HGFs through this narrow lens is problematic, as it results in targeting specific companies which are believed to have the potential to become an HGF for receipt of financing and resources necessary to realize this potential (World Bank Group, 2018).

In reality, the report found that HGFs can be start-ups; however, they’re usually a company that is past this phase. Moreover, the report found that HGFs actually exist in all sectors and locations and are not predominantly in the technology industry (World Bank Group, 2018). In Ethiopia specifically, HGFs were mostly in manufacturing and were usually grouped around large metropolitan areas. See the chart below for the breakdown.

As noted above, HGFs create over 50% of new jobs in their respective sectors. The report found that the “net change in employment and output would have been negative without the positive contributions of these firms” (Grover, et al, 2018, pg 3). Therefore, HGFs are a major indicator for determining how well an economy is performing. The dynamics that HGFs bring to emerging economies are actually similar to what has been seen in high-income economies like the United States and Sweden (pg 3).

The report also closely looked at policy initiatives and how organizations typically identify and target HGFs. Unfortunately, they found most current initiatives are misguided and target firms they erroneously believe to be high-potential. The report suggests a complete reorientation for how people view HGFs and how to effectively search for them. Their suggested method is to look for companies which hit all aspects of the “ABC’s of growth entrepreneurship: improving Allocation efficiency, encouraging Business-to-business spillovers, and strengthening firm Capabilities” (pg 5). They believe that by supporting these ABC’s, there is a positive correlation to actually seeing desirable outcomes, and these companies have a higher potential of hitting a high-growth phase. With the ABC’s in mind, the report outlines the 5 specific factors that tend to drive growth within a company. They are: innovation, network economies, managerial capabilities and worker skills, global linkages, and financial development.

Overall, the report recommends that people shift their perspectives on the indicators related to high-growth firms in order to reform policy and access to financing that may be available to this type of company. It’s a shift to supporting companies that have good innovative business practices with strong, capable management and employees, rather than targeting firms solely based on their size and sector.

For more information and to see a copy of the report, visit the below sources.


Sources:

Grover, Arti; Medvedev, Denis; Olafsen, Ellen. 2018. High-Growth Firms : Facts, Fiction, and Policy Options for Emerging Economies: Executive Summary. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/bitstream/handle/10986/30800/211368ov.pdf?sequence=4&isAllowed=y

World Bank Group. 2018. High-Growth Firms: Facts, Fiction, and Policy Options for Emerging Economies
https://www.worldbank.org/en/news/feature/2018/11/16/high-growth-firms-facts-fiction-and-policy-options-for-emerging-economies


Image Source:

Grover, Arti; Medvedev, Denis; Olafsen, Ellen. 2018. High-Growth Firms : Facts, Fiction, and Policy Options for Emerging Economies: Executive Summary. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/30800 License: CC BY 3.0 IGO.


To find out more about RENEW or the IAN, contact us at renew@renewstrategies.com, follow us on Twitter @RENEWLLC or find us on Instagram @impactangelnetwork. Be sure to check out our upcoming events, including our upcoming Econ-Tourism Trip.