Demographic Structure and Productivity Catch-Up: Theory and Evidence

Abstract

A simple model is presented to show that productivity growth falls with firm age in a country with well-developed financial market (e.g., the U.S.), but increases with firm age in a country with poor financial development (e.g., India). However, although being poor in formal financial development, China’s prosperous folk financing helps small young firms break through the limitation of credit constraint, achieving higher productivity growth than the old ones. This paper suggests that governments should support start-ups through financial development, a complement rather than a complete replacement of folk financing, to encourage the creation of more productive new companies.