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Firm Heterogeneity and Heterogeneous Growth Rates Alessandro Arrighetti X Workshop SIEPI

Firm Heterogeneity and Heterogeneous Growth Rates Alessandro Arrighetti X Workshop SIEPI Perugia 26.01.2012. 1. Outline. Are size growth rates actually inhomogeneous? Some evidence Size and age as variables influencing growth rate inhomogeneity

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Firm Heterogeneity and Heterogeneous Growth Rates Alessandro Arrighetti X Workshop SIEPI

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  1. Firm Heterogeneity and Heterogeneous Growth Rates Alessandro Arrighetti X Workshop SIEPI Perugia 26.01.2012 1

  2. Outline • Are size growth rates actually inhomogeneous? Some evidence • Size and age as variables influencing growth rate inhomogeneity • Variables other than size and age impacting growth rate • Final prompt: • we need to take firm heterogeneity more seriously in order to understand firm growth heterogeneity

  3. Are size growth rates actually inhomogeneous? • The general prediction is that (in the same industry) firm level growth rates will converge, as better practices and technologies become diffused and are imitated.(Knight 1921; Loof and Heshmati 2002) • With perfect information and low transaction costs entrepreneurs should have access to the same technologies and have the same opportunities (Oi 1983) • Over time the law of proportionate effects predicts similar growth rates independently of the firm size (Gibrat 1931)

  4. Evidence • Available evidence does not bear out these prescriptions • Size seem not to converge within or between industries (Geroski 1999; Farinas and Moreno 2000) • The growth proportionality hypothesis has been confirmed only with reference to specific size categories (Lotti et al. 2001, 2003; Becchetti and Trovato 2002). Growth dynamics appear constantly asymmetric between firms (Cefis et al. 2001; Bottazzi et al. 2002) • Small and young firms grow more than large and old ones (Henrekson and Johansson 2008; Arrighetti and Lasagni 2010)

  5. Evidence • The absence of size convergence among industrial systems of different countries is a further confirmation (Dunne and Hughes 1994; Hart 2000; Geroski and Gugler 2004; Bottazzi et al 2003; Dosi et al 2000). • A few rapidly growing firms generate a disproportionately large share of all new net jobs compared to non high-growth firms (Henrekson and Johansson 2008)

  6. Evidence Arrighetti and Lasagni 2010

  7. Evidence Arrighetti and Lasagni 2010

  8. Evidence • High-growth firms do not all grow in the same way (Delmar, Davidsson and Gartner 2003): • Clustering patterns of size growth: • Super absolute growers • Steady sales growers • Acquisition growers • Super relative growers, • Erratic one-shot growers • Employment growers • Steady overall growers.

  9. How to reconcile theory with facts? • Hp A First level of firm heterogeneity • The conflict stems from firm demography (birth and death of firms) and sub-optimal birth size

  10. First level of firm heterogeneity • Source: Bartelsman et al. 2003

  11. First level of firm heterogeneity • Small and young firms grow faster because they are born with a sub-optimal size and must adjust their size to the MES or exit the market. The choice is based on the assessment of actual managerial skills and firm economic outcomes (Jovanovic 1981; Ericson and Pakes 1995); • Small and young firms tend to become similar to large and old ones: heterogeneity is a temporary and “physiological” phenomenon; • Gibrat’s Law is rejected by the performance of the small firms segment of the whole population ( Lotti et al. 2001)

  12. First level of firm heterogeneity • The implication is : size growth →more efficiency→ more productivity →higher profit rate • Size, growth rate and profit rate are closely intertwined. • Growth rate and profit rate are positively correlated • Growth is linked : • a) to the need to reach an average profit level starting from an initial below-average profit rate or • b) to exploiting the opportunity to get an above-average profit rate starting from an average profit level .

  13. First level of firm heterogeneity • There are theoretical and empirical reasons to believe that this link is rather weak (Bottazzi et al. 2008) • Managerial economics, downsizing strategies, market differentiation assume a negative correlation between profit and firm growth (Marris 1964, etc) • Above-average profits are not translated into above-average firm growth (Geroski and Mazzucato 2002)

  14. First level of firm heterogeneity Arrighetti and Lasagni 2010

  15. First level of firm heterogeneity Growth as determinant of profitability (HGFs vs Non-HGFs Arrighetti and Lasagni 2012 Source: same as Arrighetti and Lasagni 2010

  16. First level of firm heterogeneity • Finally: • Coad (2007): “It may be more useful to consider a firm’s profit rate and its subsequent growth rate as entirely independent”

  17. First level of firm heterogeneity • Finally: • Coad (2007): “It may be more useful to consider a firm’s profit rate and its subsequent growth rate as entirely independent” • ↓ • “Behavioral freedom”

  18. Hp B Second Level Heterogeneity (Other than Age and Size) Difference in growth rates stems from heterogeneity of resources within individual firms (Arrighetti e Ninni 2008). Approaches: 1) Penrose’s view 2) Growth orientation and entrepreneurial traits 3) Role of networks and architectures 4) Institutional Factors

  19. Second Level Heterogeneity (Approach 1) • Penrose’s view (Internal resources ) • Firms compete on the basis of internal “resources” (Penrose, 1959); • The resources to compete must be effectively different (Barney 1991). • Resources are the subject of learning and their accumulation takes time (Teece 1986). And learning capability is different among firms (Lee 2010) • Their productivity comes from complementarity (Milgrom and Roberts 1995; Teece 1986): a different combination of resources produces different output with different costs. • Most of these resources are intangible and are created endogenously (Mahoney e Pandian 1992).

  20. Second Level Heterogeneity (Approach 1) • The process shows path dependency (Arthur 1989) • Intangibles are non tradable and less imitable and thus idiosyncratic to the single firm (Nelson and Winter 1982; Mahoney e Pandian 1992); • Intangible assets have a significant impact on the performance of firms (Pena 2002; Macpherson and Holt 2007); • Young (and small) firms are able to exploit ‘internal resouces’ for growth better than old ones • In sum: • Internal resources are individually differentiated and determine differentiated opportunities of growth. .

  21. Second Level Heterogeneity (Approach 2) • Growth orientation and entrepreneurial traits • There are significant differences in growth aspirations among firms (Birley, 1985; Autere & Autio 2000), and , in fact, the majority of firms do not aim for growth (Oakey, Rothwell, & Cooper, 1988). • Evidence shows a positive relationship between growth motivation and growth (e.g., Baum, Locke, & Kirkpatrick, 1998; Baum, Locke, & Smith 2001; Kolvereid & Bullvag, 1996; Miner, Smith, & Bracker, 1989).. .

  22. Second Level Heterogeneity (Approach 2) Delmar and Wiklung (2008):

  23. Second Level Heterogeneity (Approach 2) • Santarelli and Vivarelli (2006) distinguish real entrepreneurs bringing about innovation and economic growth “ from “revolving door” firms causing sub-optimality, early failures, and precarious job creation” • The adoption of more or less efficient management practices is a choice variable. Improving management practices may be a costly activity and the firm will weigh these costs against the future expected benefits (Bloom & Van Reenen 2006); • Founders' human capital exerts a direct positive effect on firm growth. Since human capital is not evenly distributed among the population of entrepreneurs, human capital contributes to amplify the heterogeneity of performance (Colombo and Grilli 2005; 2010); • Entrepreneurial skill is a scarce resource that limits the size of firms (Oi 1983)

  24. Second Level Heterogeneity (Approach 2) • When the relation between organizational size and performance is not well known, managers have to make such growth decisions without clear economic guidance. As a substitute, they use an aspiration level, which is “the smallest outcome that would be deemed satisfactory (Greve 2008) • The ‘willingness to growth’ is linked to recent organizational changes in 39% of italian manufacturing firms with >250 employees (Arrighetti and Traù 2012); • Entrepreneurial traits and orientation are able to foster the growth more in small and young firms than in the old ones • In sum: • Differences in human capital and growth orientation among entrepreneurs/managers lead to differences in the firm growth rate

  25. Second Level Heterogeneity (Approach 3) • Role of networks and architectures • Alliances and networks are pathways for the exchange of resources (Stuart 2000); • Internal capability development is linked with inter-firm relationships (Teece 1986); • Organizations with large and innovative alliance partners perform better than otherwise comparable firms that lack such partners (Stuart 2000; Yli-Renko et al. 2001),) • Interfirm networks may become historical, path-dependent templates (architectures) that coordinate the division of labor among a set of cospecialized firms (Sturgeon 2008; Jacobides et al. 2006);

  26. Second Level Heterogeneity (Approach 3) • Heterogeneity in firms’ networks of bridging ties and variations in their linkages to regional institutions are important sources of differences in firms’ competitive capabilities (MacEvely and Zaheer 1999); • Young and small firms benefit more from large and innovative strategic alliance partners than do old and large organizations (Stuart 2000); • In sum: • Firm’s embeddedness in a network of ties is an important source of variation in the acquisition of competitive capabilities and opportunities for growth.

  27. Second Level Heterogeneity (Approach 4) • Institutional Factors • Tax system, credit market conditions employment security laws may differentiate business conditions for firms with specific characteristics (startups, less capital-intensive firms family-owned firms (Henrekson and Johansson 1999; Guner Verdura Xu 2007; Heshmati 2001; Carlsson 2002); • Efficiency of judicial systems may impact on firm size distribution (Kumar, Rajan and Zingales 1999) • In sum: • Institutional factors may stress the differences between firms and influence their growth potential.

  28. Concluding remarks • Evidence shows that growth rates are actually inhomogeneous; • Firm heterogeneity in terms of size and firm age is only partly able to explain differences in growth rates; • Dissimilarity in internal resources endowments, entrepreneurial growth orientation, networking capability and institutional factors seem more consistent with the overall picture of the empirical evidence. • In addition, this approach appears to be consistent with the absence of coorelation between size growth and profit rate.

  29. Concluding remarks Final Prompt: Take the firm heterogeneity more seriously in order to understand firm growth heterogeneity

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