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Consequences on employment of initial firm capitalization

Monday 23 May 2011, by Romain Sautard

An INSEE study focusing on the French firms born in 2002 highlighted that, five years after their creation, 52% of these firms are still active. However, the firms’ survival rate is very dependent of the amount invested at their creation. Indeed, it appears that the higher the initial investment, the higher the firm survival rate:

Chart 1. Survival rate of the French firms born in 2002, 5 years after their birth, depending on the initial capital stock

Source : Insee, Sine study 2002, surveys 2002, 2005 and 2007

Thus, the survival rate of firms with an initial investment less than 2,000 euros at their creation is 46% compared to 67% for firms with an initial investment higher than 80,000 euros.

The impact of the initial investment on the firms’ survival rate is important but it is necessary to verify that it is translated into a positive impact on employment.

To validate this point, we analyzed the evolution of the number of the firms born in France in 2002 as well as their number of employees, depending on their level of initial capital stock over the period 2002-2009. The results of our study highlight that the companies with an initial capital stock higher than 100K€ create, relatively, 8.5 times more employees than companies with an initial capital stock less than 100K€. These companies, the "high growth firms ", that are very few in France, are companies with the highest growth potential.

Data used

In this study, we considered only employer companies at their creation, that is to say the companies created with at least one employee. Thus, in France, in 2002, the total number of new companies with a known initial capital stock and a known number of employees over the period 2002-2009 is as follows:

Table 1. Number of employer companies born in France in 2002

Number of employer companies newly created - 2002
Legal category
Number of employees at their creation
37,063
Companies < 100k€ of capital stock
1-5
31,439
>5
5,116
Companies > 100k€ of capital stock
1-5
254
>5
254
Source : pH Group data

Results

In order to determine whether there are differences between the two types of employer companies listed above, we studied the evolution of jobs created by such companies. It appears that the evolution of the number of employees in the two companies’ groups created in France in 2002 over 7 years is as follows:

Chart 2. Evolution of total employees of the employer companies depending on their initial capital stock level (basis 100 = 2002)

Source : pH Group data

Thus, this graph shows that, proportionally, the number of jobs created is more important and persists over a longer period for firms with an initial capital stock higher than 100K€ than for those with an initial capital stock less than 100K€. Indeed, while companies with a capital stock higher than 100K€ are net jobs creators over a period of 4 years, companies with an initial capital stock less than 100K€ are jobs destructors from their second year.

Thus, over the period under review, the average annual rate of job creation by employer companies created in 2002 with a capital stock higher than 100K€ is about 6.5%, while the average annual rate of job creation of companies having an initial capital stock less than 100K€ is -2.6%. It should be noted that the decrease in the number of employees comes mainly from the disappearance of certain employer companies over their life duration. Thus, contrary to the decrease of the number of employees in companies with an initial capital stock less than 100K€, the average number of employees per survicing firm is growing during the period under review.

However, companies still active 7 years after their creation with an initial capital stock higher than 100K€ have an average number of employees much higher than the companies with an initial capital stock less than 100K€ (18 employees in average, compared to 3 employees). Over the period under review, the increase, in absolute terms, of the average number of employees for the firms with an initial capital stock higher than 100K€ is 8.5 times higher than for those with an initial capital stock less than 100K€ (increase of 17 employees compared to an increase of 2 employees). In percentage, the number of employees per active companies after 7 years increased by 96% for companies with an initial capital stock higher than 100K€ against 55% for those with an initial capital stock less than 100K€.

Finally, after 7 years, the death rate of companies with an initial capital stock higher than 100K€ over the period under review is twice lower than for those with capital stock less than 100K€ (death rate of 21% compared with a death rate of 46% for firms with an initial capital stock less than 100K€). These results are in line with the results of the INSEE study.

Conclusion

Analysis of the evolution of the employment in firms created in 2002 as a function of their level of initial capital stock highlights that the level of initial capital stock is a key factor for the potential growth of a firm, particularly in terms of job creation: the seed is crucial for the rest of the firm life.

Thus, companies identified as the most dynamic in terms of job creation, the high growth firms, have a level of initial capital stock much higher than other companies. These firms create relatively a large share of the jobs and are net job creators over a longer period than the other firms. However, they represent a very small share of firms created every year in France (about 0.5%).

The high growth firms are the engines of job creation. Indeed, these firms are those that create relatively the most jobs over a longer period. However, looking to the lack of jobs created in France compared to the major OECD countries, it would be interesting to find out if France has enough of those powerful engines to catch up with its main neighbors.

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