Skip to main content
SpringerLink
Log in

The dynamics of the growth of firms: evidence from the services sector

  • Original Paper
  • Published:
Empirica Aims and scope Submit manuscript

Abstract

Using a dynamic panel data model with serial correlation in the error term, the purpose of this paper is to examine if Gibrat’s Law can be rejected for the services sector as it has been for manufacturing. The aim of this paper is also to improve the understanding of the empirical determinants of firm growth by extending the literature to include a new variable related to foreign participation. In addition, and based on recent developments in the growth of firms, our analysis also includes the role of the financial structure. The sample used is an unbalanced panel data set that includes all size classes, including the smallest surviving firms, from the Portuguese service sector over the period from 1995 to 2001. Applying the GMM-system estimator our findings suggest that Gibrat’s Law is rejected for the services firms. In addition, the results also indicate that firm growth is mainly explained by firm size and age. These results have significant policy implications.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. See for example Jovanovic (1982), Geroski (1995), Sutton (1997), and Caves (1998).

  2. Sutton (1997) presents an exhaustive survey on firm growth.

  3. See Audrestch et al. (2004) for a recent and exhaustive review of empirical studies on firm growth rates.

  4. MES is defined as the minimum size of the largest firms in a business group that accounts for one half of the value of sales in that business group.

  5. α ≠ 0 would allow for a deterministic trend specific to each firm, which could exist but which would be very difficult to identify with few observations per firm. The possibility of a common deterministic trend is captured, however, through the time effects δ t .

  6. With β < 1, in the short run it is possible for the variance of the cross-sectional distribution of firm sizes to either increase or decrease. In the long run, however, this variance converges and stabilises at its equilibrium value.

  7. Much discussion on these issues can be found in Lang et al. (1996), and a thorough review of theories of capital structure in Harris and Raviv (1991).

  8. According to standard results this holds, at least in large samples, without other explanatory variables.

  9. Although a more efficient two-step GMM estimator is available, the asymptotic standard errors for the two-step estimator can be an unreliable guide for inference in finite samples. Thus, inference based on the one-step estimator has been found to be more reliable than the one based on the (asymptotically) more efficient two-step estimator (Arellano and Bond 1991).

  10. Because pooled OLS is not an appropriate estimator of the parameters of the growth specifications, we focused on GMM-system results. The pooled OLS results will be made available upon request.

References

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297

    Article  Google Scholar 

  • Audretsch DB, Klomp L, Santarelli E, Thurik AR (2004) Gibrat’s Law: are the services different? Rev Ind Organ 24:301–324

    Article  Google Scholar 

  • Becchetti L, Trovato G (2002) The determinants of growth for small and medium sized firms. Small Bus Econ 19:291–306

    Article  Google Scholar 

  • Bellak C (2004) How domestic and foreign firms differ and how does it matter? J Econ Surv 18(4):483–514

    Article  Google Scholar 

  • Blonigen B, Tomlin K (2001) Size and growth of Japanese plants in the United States. Int J Ind Organ 19:931–952

    Article  Google Scholar 

  • Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143

    Article  Google Scholar 

  • Caves R (1998) Industrial organization and new findings on the turnover and mobility of firms. J Econ Lit 36:1947–1982

    Google Scholar 

  • Chen J, Lu W (2003) Panel unit root tests of firm size and its growth. Appl Econ Lett 10:343–345

    Article  Google Scholar 

  • Chesher A (1979) Testing the Law of Proportionate Effect. J Ind Econ 27:403–411

    Article  Google Scholar 

  • Cooley T, Quadrini V (2001) Financial markets and firm dynamics. Am Econ Rev 91(5):1286–1310

    Google Scholar 

  • Das S (1995) Size, age and firm growth in an infant industry: the computer hardware industry in India. Int J Ind Organ 13:111–126

    Article  Google Scholar 

  • Davis S, Haltiwanger J, Schuh S (1996) Job creation and destruction. The MIT Press, Boston

    Google Scholar 

  • Doornik J, Arellano M, Bond S (2002) Panel data estimation using DPD for OX. http://www.nuff.ox.ac.uk/Users/Doornik/

  • Dunne T, Hughes A (1994) Age, size, growth and survival: UK companies in the 1980s. J Ind Econ 42:115–140

    Article  Google Scholar 

  • Dunne T, Roberts M, Samuelson L (1988) Patterns of firm entry and exit in US manufacturing industries. RAND J Econ 19:495–515

    Article  Google Scholar 

  • Dunne T, Roberts M, Samuelson L (1989) The growth and failure of US manufacturing plants. Q J Econ 104:671–698

    Article  Google Scholar 

  • Elston J (2002) An examination of the relationship between firm size, growth and liquidity in the Neuer Markt. Economic Research Centre of the Deutsche Bundesbank, Discussion paper 15/02

  • Evans D (1987a) The relationship between firm growth, size and age: estimates for 100 manufacturing industries. J Ind Econ 35:567–581

    Article  Google Scholar 

  • Evans D (1987b) Tests of alternative theories of firm growth. J Polit Econ 95:657–674

    Article  Google Scholar 

  • Farinas J, Moreno L (2000) Firms’ growth, size and age: a nonparametric approach. Rev Ind Organ 17:249–265

    Article  Google Scholar 

  • Fotopoulos G, Louri H (2004) Firm growth and FDI: are multinationals stimulating local industrial development? J Ind Competition Trade 4(3):163–189

    Article  Google Scholar 

  • Geroski P (1995) What do we know about entry? Int J Ind Organ 13:421–440

    Article  Google Scholar 

  • Geroski P, Lazarova S, Urga G, Walters C (2003) Are the differences in firm size transitory or permanent? J Appl Econom 18:47–59

    Article  Google Scholar 

  • Gibrat R (1931) Les inégalités économiques. Librairie du Recueil Sirey, Paris

    Google Scholar 

  • Goddard J, Wilson J, Blandon P (2002a) Panel tests of Gibrat’s Law for Japanese manufacturing. Int J Ind Organ 20(3):415–433

    Article  Google Scholar 

  • Goddard J, Mckillop D, Wilson J (2002b) Credit union size and growth: tests of the Law of Proportionate Effect. J Bank Financ 22:2327–2356

    Article  Google Scholar 

  • Goddard J, Tavakolli M, Wilson J (2004) Dynamics of growth and profitability in banking. J Money, Credit Bank 36(6):1069–1090

    Article  Google Scholar 

  • Görg H, Strobl E (2001) Multinational companies and productivity spillovers: a meta-analysis. Econ J 111:723–739

    Article  Google Scholar 

  • Hardwick P, Adams M (2002) Firm size and growth in the United Kingdom life insurance industry. J Risk Insur 69:577–593

    Article  Google Scholar 

  • Hall BH (1987) The relationship between firm size and firm growth in US manufacturing sector. J Ind Econ 35:583–606

    Article  Google Scholar 

  • Harris M, Raviv A (1991) The theory of capital structure. J Financ 46:297–355

    Article  Google Scholar 

  • Hart PE, Prais SJ (1956) The analysis of business concentration: a statistical approach. J R Stat Soc Ser A 119:150–191

    Article  Google Scholar 

  • Hart PE, Oulton N (1996) Growth and size of firms. Econ J 106:1242–1252

    Article  Google Scholar 

  • Hart PE, Oulton N (1999) Gibrat, Galton and job generation. Int J Econ Bus 6:149–164

    Article  Google Scholar 

  • Heshmati A (2001) On the growth of micro and small firms: evidence from Sweden. Small Bus Econ 17:213–228

    Article  Google Scholar 

  • Jovanovic B (1982) Selection and the evolution of industry. Econometrica 50(3):649–670

    Article  Google Scholar 

  • Kamshad K (1994) Firm growth and survival: does ownership structure matter? J Econ Manag Strat 3:521–543

    Article  Google Scholar 

  • Lang L, Ofek E, Stulz R (1996) Leverage, investment, and firm growth. J Financ Econ 40:3–29

    Article  Google Scholar 

  • Mansfield E (1962) Entry, Gibrat’s Law, innovation, and the growth of firms. Am Econ Rev 52:1023–1051

    Google Scholar 

  • Markusen J, Venables A (1999) Foreign direct investment as a catalyst for industrial development. Eur Econ Rev 43:335–356

    Article  Google Scholar 

  • Mata J (1994) Firm growth during infancy. Small Bus Econ 6:27–39

    Article  Google Scholar 

  • Nurmi S (2003) Plant size, age and growth in Finnish manufacturing. Institute of Fiscal studies, London. http://cemmap.ifs.org.uk/docs/eea_nurmi.pdf

  • Oulton N (2001) Why do foreign-owned firms in the UK have higher labour productivity? In: Pain, Nigel (ed) Inward investment, technological change and growth: Palgrave. New York, pp 122–161

  • Pfaffermayr M, Bellak C (2000) Why foreign-owned firms are different? A conceptual framework and empirical evidence for Austria. Hamburg Institute of International Economics, Discussion Paper No. 115

  • Piergiovanni R, Santarelli E, Klomp L, Thurik AR (2003) Gibrat’s Law and the firm size/firm growth relationship in Italian services. Rev d’Economie Industrielle 102:69–82

    Google Scholar 

  • Simon H, Bonini C (1958) The size distribution of business firms. Am Econ Rev 48:607–617

    Google Scholar 

  • Singh A, Whittington G (1975) The size distribution of business firms. Am Econ Rev 48:607–617

    Google Scholar 

  • Sutton J (1997) Gibrat’s legacy. J Econ Lit 35:40–59

    Google Scholar 

  • Tschoegl A (1983) Size, growth and transnationality among the world’s largest banks. J Bus 56:187–201

    Article  Google Scholar 

  • Tschoegl A (1996) Managerial (dis)economies of scale: the case of regional banks in Japan. Reginald H. Jones Centre for Management Policy Strategy and Organization. University of Pennsylvania, WP, pp 96–104

  • Ushijima T (2005) Internal capital market and the growth and survival of Japanese plants in the United States. J Jpn Int Econ 19:366–385

    Article  Google Scholar 

  • Vander Vennet R (2001) The Law of Proportionate Effect and OECD bank sectors. Appl Econ 33:539–546

    Article  Google Scholar 

  • Variyam J, Kraybill D (1992) Empirical evidence on determinants of firm growth. Econ Lett 38:31–36

    Article  Google Scholar 

  • Wagner J (1992) Firm size, firm growth, and persistence of chance: testing Gibrat’s Law with establishment data from Lower Saxony, 1978–1989. Small Bus Econ 4:125–131

    Article  Google Scholar 

Download references

Acknowledgements

We are grateful to Frode Steen, Helen Louri, Christopher Snyder and the participants at the International Industrial Organization Conference (Chicago, 2004), First CEPR School in Applied Industrial Organisation (Hydra, 2004), and 31th European Association for Research in Industrial Economics (Berlin, 2004) for useful comments on an earlier draft. All errors and omissions remain our responsibility.

Author information

Authors and Affiliations

  1. Superior School of Technology and Management (ESTG), Polytechnic Institute of Leiria, Morro do Lena–Alto Vieiro, Apartado 4163, 2411-901, Leiria, Portugal

    Blandina Oliveira

  2. FEUC and GEMF, University of Coimbra, Av. Dias da Silva 165, 3004-512, Coimbra, Portugal

    Adelino Fortunato

Authors
  1. Blandina Oliveira
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Adelino Fortunato
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Blandina Oliveira.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Oliveira, B., Fortunato, A. The dynamics of the growth of firms: evidence from the services sector. Empirica 35, 293–312 (2008). https://doi.org/10.1007/s10663-008-9065-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10663-008-9065-4

Keywords

JEL classification

Search

Navigation