This paper discusses the impact of newly created firms on industry
productivity growth. Our central hypothesis is that there are two
potential effects of new firms on productivity growth: a direct
effect, as entrants may be relatively more productive than
established firms; and an indirect effect, through increased
competitive pressure that stimulates incumbents to elevate their
productivity in order to survive. The results of the decomposition
exercise of aggregate productivity growth suggest that the direct
contribution of entry is very limited. In turn, greater competition
pressure generated by new entrants seems to have forced incumbents to
improve their performance, leading to a higher level of aggregate
productivity. Finally, the indirect effect via firms exit is also
significant and positive.