A Descriptive Method of Firm Size Transition Dynamics Using Markov Chain

TL;DR

This paper introduces a Markov chain-based method to analyze and visualize firm size transition dynamics using Chinese industrial data, revealing trends and uncertainties in firm growth and decline.

Contribution

It presents a novel Markov-chain approach for depicting firm size transitions and quantifies the uncertainty and trends in these dynamics.

Findings

Small and medium firms have higher job creation potential.

Firm size transfer tends to favor growth in small and medium firms.

Transition entropy quantifies size change uncertainty.

Abstract

Social employment, which is mostly carried by firms of different types, determines the prosperity and stability of a country. As time passing, the fluctuations of firm employment can reflect the process of creating or destroying jobs. Therefore, it is instructive to investigate the firm employment (size) dynamics. Drawing on the firm-level panel data extracted from the Chinese Industrial Enterprises Database 1998-2013, this paper proposes a Markov-chain-based descriptive approach to clearly demonstrate the firm size transfer dynamics between different size categories. With this method, any firm size transition path in a short time period can be intuitively demonstrated. Furthermore, by utilizing the properties of Markov transfer matrices, the definition of transition trend and the transition entropy are introduced and estimated. As a result, the tendency of firm size transfer between small, medium and large can be exactly revealed, and the uncertainty of size change can be quantified. Generally from the evidence of this paper, it can be inferred that small and medium manufacturing firms in China have greater job creation potentials compared to large firms over this time period.