Scaling behaviour in the growth of companies

Abstract

A SUCCESSFUL theory of corporate growth should include both the external and internal factors that affect the growth of a company^1–18. Whereas traditional models emphasize production-related influences such as investment in physical capital and in research and development¹⁸, recent models^10–20 recognize the equal importance of organizational infrastructure. Unfortunately, no exhaustive empirical account of the growth of companies exists by which these models can be tested. Here we present a broad, phenomenological picture of the dependence of growth on company size, derived from data for all publicly traded US manufacturing companies between 1975 and 1991. We find that, for firms with similar sales, the distribution of annual (logarithmic) growth rates has an exponential form; the spread in the distribution of rates decreases with increasing sales as a power law over seven orders of magnitude. A model wherein the probability of a company's growth depends on its past as well as present sales accounts for the former observation. As the latter observation applies to companies that manufacture products of all kinds, organizational structures common to all firms might well be stronger determinants of growth than production-related factors, which differ for companies producing different goods.