Empirical analysis of new firm growth factors using Russian data

1. Empirical analysis of new firm growth factors using Russian data Galina V. Shirokova - Associate Professor Alexander I. Shatalov - Ph.D Student Maria Y. Molodtsova – MIB Student

2. Research goal and object • The goal - is to discover key internal and external growth factors for Russian entrepreneurial firms. • Object – Russian “entrepreneurial firms” • “Entrepreneurial firms” - firms thatare fairly young relative to settled companies and have potential for an increase in size and profitability (Bhide, 2000; Zott, Amit, 2005)

3. Topic background • The most popular single unitary indicator of company’s growth is the growth in sales (Ardishvili et al., 1998; Hoy, McDougall, Dsouza, 1992; Weinzimmer et al., 1998; Wiklund, 1998) • The growth is not the norm for any organization • Different factors can stimulate or become an obstacle for the firms growth

4. Topic background and hypotheses • There exists proof that steady enterprise growth is to some extent determined by external factors(Carroll, Hannan, 2000; Davidsson, Delmar, 1997, 2001; Jovanovich, 1982, Wiklund, 1998) • basic barriers to entrepreneurial development in Russia(Astrakhan and Chepurenko, 2003) • the example of the research which studies the environmental influence on the organizational growth H1: Higher level of environmental generosity will correspond with higher rates of growth in entrepreneurial firms

5. Topic background and hypotheses • Michael Porter (2005) theory of competition Н2: The greater the intensity of competition, the lower the growth rates of for entrepreneurial firms H3: The greater the level of diversification of buyers, the greater the tempo of growth for a firm Н4: The greater the level of diversification of suppliers, the greater the tempo of growth for a firm

6. Topic background and hypotheses • The firm’s internal dynamics receive a significant portion of scholarly attention • Six fundamental determinants of growth: a firm’s age, size, sector, site, legal form of business, and property (Storey, 1994) • The smaller and younger firms grow faster (Evans, 1987) • However, Das discovered a positive correlation between age and growth rates (Das, 1995) Н5: The older the Russian entrepreneurial firm, the lower the growth rate will be

7. Topic background and hypotheses • One direction of research into internal determinants of growth is the relation between the skill level of personnel and the rate of growth in sales • Results of analyses have been contradictory: Almus (2002) discovered a positive correlation between employees’ skills and the growth rate while Robson and Bennet (2000) did not find statistically significant relations between these variables (Robson, Bennet, 2000) Н6: Firms with higher-skilled personnel will exhibit higher rates of growth.

8. Topic background and hypotheses • Hannan and Freeman (1984): the reorganization of the firm reduces the reliability of business results because of fluctuations of quality and timeliness of collective actions decrease during reorganization Н7: Firms that undertake serious organizational reforms grow more slowly than those firms that do no undertake such reforms.

9. Topic background and hypotheses • Notha and Neir (1995) showed that hi-tech companies grow more quickly, and Lumpkin (2006) also found the direct dependence of growth rate on innovativeness. • Nevertheless, studies show that there are not significant relations between level of innovation and a company’s growth rate (Garnsey, 2006) Н8: Companies that invest in research and development exhibit higher rates of growth

10. Sample Description • Survey data on the entrepreneurial environment and enterprise (BEEPS), undertaken by the European Bank of Reconstruction and Development and the World Bank in 2005 (9500 firms from 28 countries) • A sample of 276 Russian entrepreneurial firms was created • The majority of sample were small and medium size firms (72% of the companies have less than 50 employees and 21% have from 50 to 250 constant employees) • The age of companies varies from 4 to 18 years. • The sample is distributed among different industries

11. The model description • The OLS regression analysis was applied to analyze the data • The model is as follows • Y= ß0+ß1x2+ß2x2+ß3x3+ß4x4+ß5x5+ß6х6 + ß7х7 + ε • The dependent variable in our analysis was the change in the sales volume over three years • The independent variables in our model included three main types of factors: external (environmental generosity, diversification of suppliers and buyers, intensity of competition), internal (fundamental organizational changes, professional labour, R&D investments), and age of the company

12. The model description (Variables) • Environmental generosity - the aggregation of estimates by company heads of various external circumstances (such as access to financing, cost of financing, tax policy level of corruption etc.) • Degree of diversification of suppliers and buyers - the standard deviation of the sales volume in various markets and volumes of purchases from various suppliers from the equal distribution of the sales/purchases among different markets • Intensity of competition the quantity of competitors for each concrete firm at the moment of the survey.

13. The model description (Variables) • The quantity of skilled employees was measured as a percentage of employees with a higher education • The age of company (2005 – the year of establishment) • For the volume of investment in R&D and fundamental organizational changes dummy variables were created • Organizational changes included: development of a major new product line/service, upgrade of an existing product line/service, new joint venture with foreign partner, outsourcing of a major production activity/serice, bringing in-house of a major production activity/serice, obtaining of a new quality accrediation

14. General characteristics of the regression model

15. The results of the regression analysis

16. Results • The model is statistically significant • We can accept hypotheses Н3 and H4: the estimated ß coefficient is significant and negative, that means that the higher level of diversification leads to the higher growth of the company • We can accept hypothesis Н6: the estimated ß coefficient is significant and positive and confirms that the skill level of personnel positively influences growth rates of Russian entrepreneurial companies.

17. Results • We can accept hypothesis Н5: the estimated ß coefficient is significant and negative, that proves the negative influence of the age of the company on its growth • We can’t accept hypothesis Н7: the only statistically significant variable in the group of the organizational changes is the introduction of the quality management and it’s positively related with the firm’s growth • All other hypotheses can’t be accepted

18. Study limitations • Peculiarities of the data and restrictions in using a questionnaire designed for studying the business environment, • Lack of internal factors • No personal characteristics and intentions of owners and managers on growth • The possibility of the U-shaped relation between carrying out organizational changes and growth rates • Among the classifications of growth factors for the firm in research literature, three categories stood out: external factors, internal variables, and characteristics of the leadership and managerial team. In this study we considered only the first two sets of variables

19. Conclusions • Studying growth factors for entrepreneurial firms is an important area of business research • The present study attempted to reveal those factors that significantly influence growth of entrepreneurial firms in Russia. • Both external and internal factors were analyzed. • Several variables are statistically significant: • Among environmental factors - diversification of suppliers and buyers • Among the internal factors - the share of qualified personnel, the age of the firm and the quality system establishment

20. Thank you for your attention