Regional Heterogeneity in Firm Dynamics: The Case of Italy

We document how firm dynamics differ for firms located in the South versus the Center-North of Italy, using the universe of private sector firms with at least one employee over the last three decades. Controlling for industry fixed-effects, we find that in both areas of the country firms’ age and size negatively correlate with their growth, but this negative correlation is much stronger in the South. Also, Southern firms show markedly higher unconditional entry and exit rates, but the decrease in the exit rates of larger and older firms is stronger in the South than in the rest of the country, a fact that suggests a lower level of selection faced by incumbent firms in Southern regions. These empirical facts point to structural differences in the selection and growth dynamics of Southern firms with respect to the rest of the country that go beyond different sectoral specializations, and call for decisive reforms to the institutional environment—judicial and bureaucratic—as well as for the need of a significant increase in human capital.