Vol.:(0123456789) Business Economics https://doi.org/10.1057/s11369-019-00137-4 ORIGINAL ARTICLE Diehard or delicate? Violence and young frm per formance in a developing country Ummad Mazhar 1  · Fahd Rehman 1 © National Association for Business Economics 2019 Abstract The genesis and survival of new businesses is an important determinant of entrepreneurial dynamism. With the recent surge in security challenges, the issue of young frms’ resilience has surfaced. How do changes in external risks afect frms of dif- ferent ages? Using Enterprise Surveys, we construct a unique data set of more than 2000 frms locating across Pakistan. The information is used to estimate the link between frms’ employment growth and alternative measures of political violence at the provincial level. The key estimates suggest that the youngest frms in our sample experience 45% lesser growth in employment each year when terrorism escalates at its average rate. The growth cut is 31% for old frms. These fndings are not conditional on frm size or the way political violence is measured. A battery of statistical tests, including an instrumental variables estimator, validates the inference. Keywords Firm age · Firm performance · Political violence · Terrorism · Pakistan JEL Classifcation D22 · F50 · L25 · L26 · M13 · P48 1 Introduction Firm age is an important determinant of its performance. However, little is known about the performance of young frms in a developing country context (Coad 2018 surveys the literature). This is surprising as many frms in develop- ing countries are part of the supply chains of global corpo- rations. Understandably, frms in Western economies incur transaction costs and face risks when they enter into contract with developing countries’ suppliers (Siems 2005). These costs could be search and investigation ones, and there is a need to identify the potential local suppliers. Information on their reliability, credit worthiness, cost of internal opera- tions, and nature of local risks is required. This study shows the viability of very young frms under a weak political envi- ronment in a developing country like Pakistan. With China’s Belt and Road Initiative (BRI), the econo- mies in the Asia-Pacifc region are ofering opportunities to developed country corporations to take advantage of the growth potential of the region, its favorable demography, and large labor market (O’Trakoun 2018). In this context, Pakistan is uniquely positioned to play the role of an eco- nomic corridor linking China with other countries in West Asia, Central Asia, the Persian Gulf, and Africa. Being a part of China’s BRI, and a member of the South Asian nuclear club, the business environment in the country can afect the regional geopolitical risk environment. This paper looks beyond the usual indexes of business conditions to identify political violence as one weakness that can hamper performance of young frms in Pakistan. We use a novel empirical strategy to estimate the link between weak political environment and the performance of young frms. Specifcally, we categorize young frms into two main groups. The frst group (labeled very young) com- prises frms of ages 2 or 3 years, while the second group (labeled young) consists of frms with ages 4 to 7 years. The category of very young frms is chosen to focus on years generally considered most turbulent in a frm’s life (Coad et al. 2018a, b; Calvino et al. 2015; Hiatt and Sine 2014). * Ummad Mazhar ummad.mazhar@lums.edu.pk Fahd Rehman fahd.rehman@lums.edu.pk 1 Suleman Dawood School of Business (SDSB), Lahore University of Management Sciences (LUMS), Lahore, Pakistan