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Empirical Investigations Into the Characteristics and Determinants of the Growth of Firms Alex Coad

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Empirical Investigations Into the Characteristics and Determinants of the Growth of Firms Alex Coad Empirical investigations into the characteristics and determinants of the growth of firms Alex Coad To cite this version: Alex Coad. Empirical investigations into the characteristics and determinants of the growth of firms. Economics and Finance. Université Panthéon-Sorbonne - Paris I, 2007. English. tel-00163394 HAL Id: tel-00163394 https://tel.archives-ouvertes.fr/tel-00163394 Submitted on 17 Jul 2007 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. UNIVERSITE PARIS 1 PANTHEON-SORBONNE SANT’ANNA SCHOOL OF ADVANCED STUDIES ECOLE DOCTORALE DOCTORAT SCIENCES ECONOMIQUES COAD, Alexander Jean-Luc EMPIRICAL INVESTIGATIONS INTO THE CHARACTERISTICS AND DETERMINANTS OF THE GROWTH OF FIRMS Thèse dirigée par: Bernard PAULRE (Univ. Paris 1 Panthéon-Sorbonne) Giovanni DOSI (Sant’Anna School of Advanced Studies, Pisa) Soutenue à Paris le 23 avril 2007 JURY: François GARDES (Univ. Paris 1 Panthéon-Sorbonne) Giulio BOTTAZZI (Sant’Anna School of Advanced Studies, Pisa) Jacques MAIRESSE (CREST, ENSAE, Paris) EMPIRICAL INVESTIGATIONS INTO THE CHARACTERISTICS AND DETERMINANTS OF THE GROWTH OF FIRMS A DISSERTATION SUBMITTED TO THE S.ANNA SCHOOL OF ADVANCED STUDIES IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS AND MANAGEMENT Alexander Jean-Luc Coad April 2007 L’université de Paris 1 n’entend donner aucune approbation ni improbation aux opinions émises dans cette thèse. Ces opinions doivent être considérées comme propres à leur auteur. 1 Acknowledgements I am especially grateful to my PhD supervisors, Bernard Paulr´eand Giovanni Dosi, who, surprisingly enough, always managed to make time to read my early drafts and discuss them with me despite their busy schedules. Indeed, many of the better ideas to be found in this thesis emerged from discussions with them. I would also like to thank Peter Allen, Ashish Arora, Eric Bartelsman, Carlo Bianchi, Alan Blinder, Giulio Bottazzi, Thomas Brenner, Alessandra Canepa, Adrian Coad, Larry Chris- tiano, Michael Cohen, Paul David, Hadifa El-Younsi, Giorgio Fagiolo, Koen Frenken, Jean- Pierre Galavielle, Giovanni Gavetti, Paula Giuri, Marco Grazzi, Shane Greenstein, Bronwyn Hall, Nadia Jacoby, Dan Levinthal, Patrick Llerena, Alessandra Luzzi, Steve Machin, Franco Malerba, Luigi Marengo, Orietta Marsili, Peter Maskell, Mariana Mazzucato, Stan Metcalfe, Pierre Mohnen, Max Molinari, Jean-Marie Monnier, Richard Nelson, Luigi Orsenigo, Rekha Rao, Toke Reichstein, Angelo Secchi, Maider Saint-Jean, Martjin Smit, Marina-Eliza Spaliara, Fede Tamagni, Marco Valente, Larry White, Sid Winter, Ulrich Witt and Mahmut Yasar, for stimulating discussions and helpful comments. More generally, I am also grateful to comments made by participants at presentations at Universit´eParis 1 Panth´eon-Sorbonne, the Sant’Anna School of Advanced Studies, Pisa, the Evolutionary Economics group at the Max-Planck-Institute (Jena, Germany), the Universit`a di Pisa, UNU-Merit (Maastricht), and also conference participants at ESSID 2005, DRUID Summer conference 2006, the 4th Sant’Anna School PhD conference in Volterra (September 2006), the IKD-DIME London conference (December 2006), the Universit`adi Pisa conference in Lucca (January 2007), and ICEEE 2007. Also I would like to thank Elda Andr´e,Annie Garnero, Nadine Hengel, Jean-Luc Outin, and Eric Zyla (Paris 1), Laura Ferrari and Luisa Martolini (Pisa), and Dani`eleBastide (INSEE) for their kind help on administrative issues. My frequent journeying between Paris and Pisa would not have been possible without fi- nancial support from the VINCI project run by the Universit´eFranco-Italienne. Furthermore, financial support from the Center for International Programs Abroad (CIPA) at Emory Uni- versity, Atlanta (GA), is gratefully acknowledged concerning a two month research visit at the end of 2005. Contents 1 Introduction 5 I Literature review 14 2 A Survey of Firm Growth 15 2.1 Introduction . 15 2.2 Empirical evidence on firm growth . 16 2.2.1 Size and growth rates distributions . 16 2.2.2 Gibrat’s Law . 21 2.2.3 Other determinants of firm growth . 30 2.2.4 Conclusion . 42 2.3 Theoretical contributions . 45 2.3.1 Neoclassical foundations – growth towards an ‘optimal size’ . 45 2.3.2 Penrose’s ‘Theory of the Growth of the Firm’ . 46 2.3.3 Marris and ‘managerialism’ . 48 2.3.4 Evolutionary Economics and the principle of ‘growth of the fitter’ . 49 2.3.5 Population ecology . 52 2.3.6 Conclusion . 53 2.4 Growth strategies . 54 2.4.1 Attitudes to growth . 54 2.4.2 Growth strategies – replication or diversification . 59 2.4.3 Internal growth vs growth by acquisition . 64 2.5 Growth of small and large firms . 65 2.5.1 Differences in growth patterns for small and large firms . 65 2.5.2 Modelling the ‘stages of growth’ . 67 2.6 Conclusion . 71 2 CONTENTS 3 II Regularities in the growth process 73 3 Corporate growth and industrial dynamics 74 3.1 Introduction . 74 3.2 Data description . 76 3.3 Aggregate properties . 76 3.3.1 Size distribution . 77 3.3.2 Growth rates distribution . 82 3.4 Sectoral properties . 84 3.4.1 Size distribution . 84 3.4.2 Distribution of growth rates . 89 3.5 Conclusion . 91 4 A closer look at autocorrelation 93 4.1 Introduction . 93 4.2 Literature review . 95 4.3 Database . 97 4.4 Analysis . 97 4.4.1 Summary statistics . 97 4.4.2 Regression analysis . 99 4.4.3 Does autocorrelation vary with firm size? . 100 4.5 Quantile regression analysis . 102 4.5.1 An introduction to quantile regression . 102 4.5.2 Quantile regression results . 104 4.5.3 Robustness across size groups . 105 4.5.4 Robustness to temporal disaggregation . 108 4.5.5 Robustness to sectoral disaggregation . 109 4.6 Summary and Conclusions . 110 III Financial performance and growth 116 5 Theories of financial constraints 117 5.1 Introduction . 117 5.2 A review of the three theories . 118 5.2.1 q theory . 118 5.2.2 Imperfect markets theory . 121 5.2.3 Evolutionary theory . 123 5.3 A comparison of these theoretical perspectives . 125 CONTENTS 4 5.4 A comparison of the policy recommendations . 128 5.5 Conclusion . 129 6 Profits and growth 131 6.1 Introduction . 131 6.2 Database . 135 6.3 Methodology . 137 6.3.1 Sources of endogeneity in the regression of profits on growth . 137 6.3.2 An introduction to system GMM . 138 6.4 Analysis . 140 6.4.1 Non-parametric analysis . 140 6.4.2 Parametric analysis . 141 6.5 Conclusion . 147 IV Innovation and growth 149 7 Innovation and growth 150 7.1 Innovation and Sales Growth – What do we know? . 151 7.2 Methodology - How can we measure innovativeness? . 154 7.3 Database description . 156 7.3.1 Database . 156 7.3.2 Summary statistics and the ‘innovativeness’ index . 158 7.4 Quantile regression results . 160 7.5 Conclusions and Implications for Policy . 166 8 Innovation and market value 169 8.1 Introduction . 169 8.2 Database Description and Summary Statistics . 170 8.3 Quantile regression results . 173 V Conclusion 177 9 Conclusion 178 Chapter 1 Introduction The primary focus of this thesis is to advance our understanding of the phenomenon of firm growth. In our modern economy, industries are becoming more and more turbulent and the struggle between firms for market share is becoming increasingly fierce. The growing impor- tance of innovation, in particular, has been responsible for this. In addition, the development of financial institutions has enabled firms to accelerate their expansion projects with the sup- port of external finance. Globalization has forced firms to become aware of their overseas markets, as the struggle for customers can no longer be confined within national borders. More generally, the fast pace of the information age has changed the way firms operate, bring- ing customers closer to their suppliers. For all of these reasons, and more besides, we believe it is necessary to take a new look at the growth of firms. It is instructive to place firm growth in a historical perspective. In the past, a large size was a prerequisite for security. Firms strove to become large in order to guarantee their future. The advantages of a large size were reinforced by the relatively backward state of financial markets. Large firms had the advantage of ‘deeper pockets’ into which they could delve during adverse business conditions. Another factor to be taken into consideration is that at the beginning of the twentieth century, the ‘Fordist’ brand of mass-production techniques was very much in vogue. During this period, the growth of firms was associated with economies of scale and lower unit costs. Furthermore, firms began to question the mono-product business model that had hitherto been the norm. In this vein, Du Pont de Nemours achieved legendary success by engaging in a diversified portfolio of activities arranged in the context of a decentralized and multidivisional organizational form. In addition, it was conjectured (e.g. by Schumpeter) that it was primarily the large firms that were willing and capable of investing in R&D laboratories. Large size was therefore considered to be a sign of the accomplishment of a firm’s aspirations, and as something of an ‘ultimate stage’ in a firm’s development. In the present business climate, however, there is an emphasis on flexibility and ‘lean’ production. We are now in an age where downsizing and refocusing are celebrated strategies.
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