CHAPTER 4
them to more easily operate semiformally. This is corroborated by the relationship between density of microfirms and the share of the informal sector in the economy.42 Both elements provide an incentive for firms to stay small (figure 4.24). At the same time, faced with more complicated business regulations and competition from microenterprises, small and medium enterprises and larger firms in Southern Europe find it harder to grow. They are likely to survive but shrink in size. A healthy competitive process should select companies so the better ones survive and graduate toward larger classes while inefficient companies exit the market. This is not what happens in Southern Europe. Firms do not grow, they often downsize, but do not exit the market.
Figure 4.23: In the EU15, size matters more than country for exports (percentage of exporting firms and share of export per size class, 2008)
Source: Barba Navaretti and others 2011; and Eurostat.
Figure 4.24: In a difficult business environment, firms stay small and operate more informally (business environment, share of informal economy and microenterprises in the EU15)
Note: For Ireland, data refer to 2005. Source: World Bank staff calculations, based on Eurostat, Doing Business, and Schneider and others (2010).
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