Post-Entry Behaviour and the Cycle: Evidence From Germany

Abstract

Based on a rich database on establishments in western Germany, the paper aims at characterising the relationship between, on the one hand, growth and exit of entering cohorts and, on the other hand, aggregate business fluctuations. A main finding is that exit is not responsive to the cycle, which is at odds with views of recessions as times of 'cleansing' where creative destruction processes occur. The growth of survivors also displays little cyclical sensitivity, but tends to become more responsive to aggregate business fluctuations as the cohort ages. Two possible explanations for this role of age on the cyclical sensitivity of surviving units are offered in the final section of the paper. The first draws on the product specialisation of young and more established plants, the second on the role of irreversible investment and industry selection.