Abstract
The empirical literature dealing with corporate growth does not in general give support to Gibrat’s Law stating that the expected increase in firm size is proportionate to its initial size, leaving their growth rates independent of size. Using a relatively large and representative sample of approximately 2,500 Danish firms representing all industries, we have evaluated the validity of Gibrat’s Law over the period 1990–2004. The present analysis addresses this question by applying econometric methods to test Gibrat’s Law and correcting for problems related to autocorrelation. The empirical findings of our study do not generally support Gibrat’s Law, but in contrast to the results of earlier studies, the analysis reveals that firms’ growth rates are more likely to be positively related to firm size.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
If any drift is present, the growth rate is not independent of firm size.
This information is collected and organized by a private consultant company, Experian A/S.
The data set spans the period 1990–2004 and, therefore, the regression in Table 5 for 1991 may be less valid compared to the 1995, 2000 and 2004 regression results as lower ‘growth dynamics’ may be present in the 1990–1991 part of the data set.
References
Audretsch, D. B. (2002). The dynamic role of small firms: Evidence from the U.S. Small Business Economics, 18, 13–40.
Audretsch, D. B., Klomp, L., & Thurik, A. R. (2004). Gibrat’s Law: Are the services different? Review of Industrial Organization, 24, 3001–3324.
Bentzen, J., Madsen, E. S., & Smith, V. (2006). The growth opportunities for SMC. Journal of Business and Management, VII, 139–145.
Blonigen, B. A., & Tomlin, K. (2001). Size and growth of Japanese plants in the United States. International Journal of Industrial Organization, 19, 931–952.
Chesher, A. (1979). Testing the law of proportionate effect. The Journal of Industrial Economics, 27(4), 403–411.
Coad, A., & Rao, R. (2008). Innovation and firm growth in high-tech sectors: A quantile regression approach. Research Policy, 37, 633–648.
European Commission. (2010). European SMEs under pressure, annual report on EU small and medium sized enterprises 2009. Directorate-General for Enterprise and Industry.
Fotopoulos, G., & Giotopoulos, I. (2010). Gibrat’s Law and the persistence of growth in Greek manufacturing. Small Business Economics, 35, 191–202.
Fotopoulos, G., & Louri, H. (2004). Firm growth and FDI: Are multinationals stimulating local industrial development? Journal of Industry, Competition and Trade, 4, 163–189.
Geroski, P. A. (2003). The evolution of new markets. Oxford: Oxford University Press.
Gibrat, R. (1931). Les Inegalities Economiques. Paris: Sirey.
Giotopoulos, I., & Fotopoulos, G. (2010). Intra-industry growth dynamics in the Greek services sector: Firm-level estimates for ICT-producing, ICT-using, and Non-ICT industries. Review of Industrial Organization, 36, 59–74.
Goddard, J., McMillan, D., & Wilson, J. O. S. (2006). Do firm size and profit rates converge? Evidence on Gibrat’s Law and the persistence of profits in the long run. Applied Economics, 38, 267–278.
Hart, P. E., & Oulton, N. (1996). The size and growth of firms. Economic Journal, 106, 1242–1252.
Hart, P. E., & Oulton, N. (1999). Gibrat, Galton and job generation. International Journal of the Economics of Business, 6, 149–164.
Hartwick, P., & Adams, M. (2002). Firm size and growth in the United Kingdom life insurance industry. The Journal of Risk and Insurance, 69, 577–593.
Leitão, J., Nunes, P. J. M., & Serrasqueiro, Z. M. (2010). Testing Gibrat‘s Law for listed Portuguese companies: A quantile approach. International Research Journal of Finance and Economics, 37, 147–158.
Lipczinsky, J., Wilson, J., & Goddard, J. (2005). Industrial organization—Competition, strategy, policy (2nd ed.). New York: FT Prentice Hall.
Lotti, F., Santarelli, E., & Vivarelli, M. (2003). Does Gibrat’s Law hold among young, small firms? Journal of Evolutionary Economics, 13, 213–235.
Lotti, F., Santarelli, E., & Vivarelli, M. (2009). Defending Gibrat’s Law as a long-run regularity. Small Business Economics, 32, 31–44.
Mansfield, E. F. (1962). Entry, innovation, and the growth of firms. American Economic Review, 52, 1023–1051.
Monte, A. D., & Papagni, E. (2003). R&D and the growth of firms: Empirical analysis of a panel of Italian firms. Research Policy, 32, 1003–1014.
Nunes, P. J. M., & Serrasqueiro, Z. M. (2009). Gibrat’s Law: Empirical test of Portuguese service industries using dynamic estimators. The Service Industries Journal, 29, 219–233.
Oliveira, B., & Fortunato, A. (2006). Testing Gibrat’s Law: Empirical evidence from a panel of Portuguese manufacturing firms. International Journal of the Economics of Business, 13, 65–81.
Oliveira, B., & Fortunato, A. (2008). The dynamics of the growth of firms: Evidence from the services sector. Empirica, 35, 293–313.
Petrunia, R. (2008). Does Gibrat’s Law hold? Evidence from Canadian retail and manufacturing firms. Small Business Economics, 30, 201–214.
Wilson, J. O. S., & Morris, J. E. (2000). The size and growth of UK manufacturing and service firms. Service Industries Journal, 20, 25–38.
Wilson, J. O. S., & Williams, J. M. (2000). The size and growth of banks: Evidence from four European countries. Applied Economics, 32, 1101–1109.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Bentzen, J., Madsen, E.S. & Smith, V. Do firms’ growth rates depend on firm size?. Small Bus Econ 39, 937–947 (2012). https://doi.org/10.1007/s11187-011-9341-8
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11187-011-9341-8