• Zhu Xuanli Graduate School of Economics, The University of Tokyo

• Daiji Kawaguchi Professor, Graduate School of Economics, The University of Tokyo

This paper documents three important but largely undocumented facts on the evolution of the establishment dynamism in post-war Japan. First, the entry rate continues to decrease since the late 1950s, along with a declined and stagnated exit rate. As a result, the population of business units keeps growing older. Second, the average size of establishments fall substantially in the 1960s and 1970s, especially in manufacturing and construction sectors. Third, the average life cycle growth of the establishments that enter in a typical year is low, and correlated with the cohort’s average size at birth. These facts indicates that the underlying reason for the low market dynamism in Japan is largely historical, and that understanding the changes in life cycle growth profile of establishments in early historical episodes are important for understanding the market dynamism today. We then use the canonical firm dynamics model to study the potential drivers behind these observed trends. We find that while the decline in labor force growth rate can account for most of the decline in entry rate, labor friction costs, either distorted or not, fail to explain the declined average establishment size and the retarded life cycle growth. Finally we argue that the evolution of the subcontracting in post-war Japan may contribute to the patterns in average establishment size and average life cycle growth that we observed.