The elusive quest for high-growth firms in Africa: when other metrics of performance say nothing

Abstract

The purpose of this paper is to study the persistence of firm growth in Africa, dedicating special attention to high-growth firms. The worldwide interest in identifying high-growth firms comes from the idea that these firms will continue to outperform in the future and to create jobs. We exploit a rich dataset covering all formal firms operating in Senegal from 2006 to 2015 to scrutinize growth persistence. We document that growth rates are negatively correlated across time, especially for high-growth firms, in line with evidence from industrialized countries. A top performer is more likely to become a bad performer in the next period than to sustain its previous performance. We show that other indicators of performance (such as profitability and productivity in the first period) are unrelated to the persistence of growth. This finding challenges the possibility of policymakers and investors selecting persistent high-growth firms by scrutinizing their previous performances.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. 1.

    We extend the Table provided by Daunfeldt and Halvarsson (2015). Interested readers may refer to this article and other papers (Coad and Hölzl 2009; Coad et al. 2018) for a description of works published before 2005.

  2. 2.

    Two papers (Daunfeldt and Halvarsson 2015; Capasso et al. 2014) also investigate the transition matrix and therefore the ability for HGFs to be permanent.

  3. 3.

    These figures are in line with those provided by Capasso et al. (2014) and Daunfeldt and Halvarsson (2015). Hölzl (2014) document that High-Growth Firms are more likely to sustain growth when they are measured using the Birch Index.

  4. 4.

    Coad et al. (2014) point out that HGFs are not more frequent in some industries (e.g., high-tech sector) than in other sectors. However, size and age play a role. The autocorrelation is negative for small firms, while large firms show positive or no persistence in growth rate (Coad 2007; Coad and Hölzl 2009; Capasso et al. 2014). Young firms exhibit positive autocorrelation in growth rate, contrary to old ones, as documented by Coad et al. (2018). We test whether in a different context these findings remain valid. In addition, we add other firm characteristics, especially ownership. These is a priori no reason to believe that foreign-owned firms differ from domestic-owned firms in the profile of growth. However, the impact of size could be blurred by ownership insofar as foreign-owned firms are larger than local ones in developing countries.

  5. 5.

    Data are extracted from survey in Senegal in 2014 and are available at: www.enterprisesurveys.org.

  6. 6.

    In 1981 between Léopold Sédar Senghor and his former Prime minister Adbou Diouf. In 2000, the historical opponent Abdoulaye Wade was elected and remained in office until 2012. In 2012, Macky Sall became the fourth president of Senegal.

  7. 7.

    Data are not freely available but the last report (in French) based on these data is available in the ANSD website at the following link: http://www.ansd.sn/ressources/rapports/Rapport%20global-05-07-2017.pdf

  8. 8.

    When an observation in t is lacking while we have data in t-1 and t + 1, we apply the arithmetic average to infer the value in t for financial value (sales). For employment, we fill the gap if the number of employees is unchanged between t-1 and t + 1. Results (available upon request) are robust when we do not apply this correction.

  9. 9.

    Firm size is the logarithm of sales when we consider sales growth or the logarithm of employment when we consider employment growth.

  10. 10.

    As a robustness check, we also extend Eq. (2) by adding interactions with other metrics of performance. Econometric results are closely similar.

  11. 11.

    Because our sample assembles together formal firms, the number of firms with no employees is lower than 5%. Econometric results are insensitive when we consider the number of employees rather than the number of workers (employees plus one).

  12. 12.

    In a previous version of the paper, we run econometric models using the triannual growth rate instead of average 3-year growth rates. Results are closely similar to those reported in Tables A2-A5.

  13. 13.

    The distribution of 3-year growth rate provides a close picture (available upon request). However, in this case, the distribution of employment growth is more concentrated toward zero.

  14. 14.

    Table 2 only displays the median for the sake of brevity.

  15. 15.

    The use of value-added explains the negative value of labor productivity in some cases. However, this issue concerns only 5% of firms.

  16. 16.

    Results are unchanged when interactions enter one by one (available upon request). Findings from the 3-year growth rate are displayed in Table A4 in the Appendix. We confirm our main findings for size and age. Results are less robust for foreign-dummy.

  17. 17.

    We employ the qregdp command in Stata developed by Baker et al. (2016).

  18. 18.

    The formula is \( \overset{\sim }{Gr}{(y)}_{\mathrm{i},\mathrm{t}}=\frac{\left({y}_{\mathrm{i},\mathrm{t}}-{y}_{\mathrm{i},\mathrm{t}-1}\right)}{0.5\left({y}_{\mathrm{i},\mathrm{t}}+{y}_{\mathrm{i},\mathrm{t}-1}\right)} \)

  19. 19.

    We thank a reviewer for inviting us to consider sectoral characteristics.

  20. 20.

    In theory the value should be minus infinity because log(0) equals minus infinity. The minimum of growth never exceeds − 15 for continuing firms so fixing the value to − 100 seems a good approximation.

  21. 21.

    We do not state that firms with a positive debt ratio are not credit-constrained. Indeed, these firms may suffer from a limited access to funds (want higher loan amount or lower interest rates). We cannot measure the intensity of this form of credit constraints. In addition, the importance of the lack of access to banks is certainly more detrimental than obtaining loans at unfavorable conditions.

References

  1. Aga, G., & Francis, D. (2017). As the market churns: rjroductivity and firm exit in developing countries. Small Business Economics, 49, 379–403. https://doi.org/10.1007/s11187-016-9817-7.

    Article  Google Scholar 

  2. ANSD (2017). Rapport global du recensement général des entreprises, Agence Nationale de la Statistique et de la Démographie - Ministère de l’Economie, des Finances et du Plan, Dakar, Jan. 2017.

  3. Ayyagari, M., Demirgüç-Kunt, A., & Maksimovic, V. (2020). Are large firms born or made? Evidence from developing countries. Small Business Economics,in press. https://doi.org/10.1007/s11187-019-00303-0.

  4. Baker, M., Powell, D., Smith, T.A. (2016). GREGDP: Stata module to perform Quantile Regression for Panel Data. Statistical Software Components S458157, Boston College Department of Economics.

  5. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. https://doi.org/10.1177/014920639101700108.

    Article  Google Scholar 

  6. Beck, T., & Demirgüç-Kunt, A. (2006). Small and medium-size enterprises: access to finance as a growth constraints. Journal of Banking & Finance, 30(11), 2931–2943. https://doi.org/10.1016/j.jbankfin.2006.05.009.

    Article  Google Scholar 

  7. Bianchini, S., Bottazzi, G., & Tamagni, F. (2017). What does (not) characterize persistent corporate high-growth? Small Business Economics, 48, 633–656. https://doi.org/10.1007/s11187-016-9790-1.

    Article  Google Scholar 

  8. Bloom, N., Mahajan, A., McKenzie, D., & Roberts, J. (2010). Why do firms in developing countries have low productivity? American Economic Review: Paper & Proceedings, 100(2), 619–623. https://doi.org/10.1257/aer.100.2.619.

    Article  Google Scholar 

  9. Bottazzi, G., & Secchi, A. (2006). Explaining the distribution of firm growth rates. The Rand Journal of Economics, 37(2), 235–256.

    Article  Google Scholar 

  10. Bottazzi, G., Coad, A., Jacoby, N., & Secchi, A. (2011) Corporate growth and industrial dynamics: evidence from French manufacturing. Applied Economics, 43(1), 103–116. https://doi.org/10.1080/00036840802400454.

  11. Bruhn, M., Karlan, D., & Schoar, A. (2010). What capital is missing in developing countries? American Economic Review, 100, 629–633. https://doi.org/10.1257/aer.100.2.629.

    Article  Google Scholar 

  12. Capasso, M., Cefis, E., & Frenken, K. (2014). On the existence of persistently outperforming firms. Industrial and Corporate Change, 23(4), 997–1036. https://doi.org/10.1093/icc/dtt034.

    Article  Google Scholar 

  13. Coad, A. (2007). A closer look at serial growth rate correlation. Review of Industrial Organization, 31, 69–82. https://doi.org/10.1007/s11151-007-9135-y.

    Article  Google Scholar 

  14. Coad, A. (2009). The growth of firms: a survey of theories and empirical evidence. Cheltenham and Northampton: Edward Elgar ISBN: 978-1848443273.

    Book  Google Scholar 

  15. Coad, A., & Hölzl, W. (2009). On the autocorrelation of growth rates: Evidence from micro, small and large firms from the Austrian Services Industries, 1975-2004. Journal of Industry Competition and Trade, 9(2), 139–166. https://doi.org/10.1007/s10842-009-0048-3.

    Article  Google Scholar 

  16. Coad, A., & Srhoj, S. (2019). Catching gazelles with a lasso: big data techniques for the prediction of high-growth firms. Small Business Economics, forthcoming. https://doi.org/10.1007/s11187-019-00203-3.

  17. Coad, A., Daunfeldt, S.-O., Hölzl, W., Johansson, D., & Nightingale, P. (2014). High-growth firms: Introduction to the special issue. Industrial and Corporate Change, 23(1), 91–112. https://doi.org/10.1093/icc/dtt052.

    Article  Google Scholar 

  18. Coad, A., Cowling, M., & Siepel, J. (2017). Growth processes of high-growth firms as a four-dimensional chicken and egg. Industrial and Corporate Change, 26(4), 537–554.

    Article  Google Scholar 

  19. Coad, A., Daunfeldt, S.-O., & Halvarsson, D. (2018). Bursting into life: firm growth and growth persistence by age. Small Business Economics, 50, 55–75. https://doi.org/10.1007/s11187-017-9872-8.

  20. Daunfeldt, S.-O., & Halvarsson, D. (2015). Are high-growth firms one-hit wonders? Evidence from Sweden. Small Business Economics, 44, 361–383. https://doi.org/10.1007/s11187-014-9599-8.

    Article  Google Scholar 

  21. Daunfeldt, S.-O., Halvarsson, D., & Mihaescu, O. (2016). High-growth firms: Not so vital after all? International Review of Entrepreneurship, 14(4), 377–394.

  22. Davidsson, P., Steffens, P., & Fitzsimmons, J. (2009). Growing profitable of growing from profits: Putting the horse in front of the cart? Journal of Business Venturing, 24(4), 388–406. https://doi.org/10.1016/j.busvent.2008.04.003.

    Article  Google Scholar 

  23. Davies, E., & Kerr, A. (2018). Firm survival and change in Ghana, 2003-2013. Journal of African Economies, 27(2), 149–171. https://doi.org/10.1093/jae/ejx023.

    Article  Google Scholar 

  24. Delmar, F., Davidsson, P., & Gartner, W. B. (2003). Arriving at the high-growth firm. Journal of Business Venturing, 18(2), 189–216. https://doi.org/10.1016/S0883-9026(02)00080-0.

    Article  Google Scholar 

  25. Du, J., & Temouri, Y. (2015). High-growth firms and productivity: evidence from the United Kingdom. Small Business Economics, 44, 123–143. https://doi.org/10.1007/s11187-014-9584-2.

    Article  Google Scholar 

  26. Easterly, W., Kremer, M., Pritchett, L., & Summers, L. H. (1993). Good policy or good luck? Country growth performance and temporary shocks. Journal of Monetary Economics, 32(3), 459–483. https://doi.org/10.1016/0304-3932(93)90026-C.

    Article  Google Scholar 

  27. Fafchamps, M. (2004). Market institutions in sub-Saharan Africa: theory and evidence. Cambridge: The MIT Press.

    Google Scholar 

  28. Federico, J. S., & Capalleras, J.-L. (2015). Heterogeneous dynamics between growth and profits: The case of young firms. Small Business Economics, 44, 231–253. https://doi.org/10.1007/s11187-008-9598-9.

    Article  Google Scholar 

  29. Fotopoulos, G., & Giotopoulos, I. (2010). Gibrat’s law and persistence of growth in Greek manufacturing. Small Business Economics, 35(2), 191–202. https://doi.org/10.1007/s11187-008-9163-5.

    Article  Google Scholar 

  30. Galton, F. (1886). Regression towards mediocrity in hereditary stature. The Journal of the Anthropological Institute of Great Britain and Ireland, 15, 246–263.

    Article  Google Scholar 

  31. Gibrat, R. (1931). Les inégalités économiques. Paris: Librairie du Receuil Sirey.

    Google Scholar 

  32. Goedhuys, M., & Sleuwaegen, L. (2010). High-growth entrepreneurial firms in Africa: a quantile regression approach. Small Business Economics, 34, 31–51. https://doi.org/10.1007/s11187-009-9193-7.

    Article  Google Scholar 

  33. Grover Goswami, A., Medvedev, D., & Olafsen, E. (2019). High-growth firms: facts, fiction, and policy options for emerging economies. Washington D.C.: World Bank Group.

  34. Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2013). Who creates jobs? Small versus large versus young. Review of Economics and Statistics, 85(2), 347–361. https://doi.org/10.1162/REST_a_00288.

    Article  Google Scholar 

  35. Hausmann, R., Pritchett, L., & Rodrick, D. (2005). Growth accelerations. Journal of Economic Growth, 10, 303–329. https://doi.org/10.1007/s10887-005-4712-0.

    Article  Google Scholar 

  36. Henrekson, M., & Johansson, D. (2010). Gazelles as job creators: a survey and interpretation of the evidence. Small Business Economics, 35(2), 227–244. https://doi.org/10.1007/s11187-009-9172-z.

    Article  Google Scholar 

  37. Hölzl, W. (2014). Persistence, survival, and growth: a closer look at 20 years of fast-growing firms in Austria. Industrial and Corporate Change, 23(1), 199–231. https://doi.org/10.1093/icc/dtt054.

    Article  Google Scholar 

  38. Hsieh, C.-T., & Klenow, P. (2014). The life cycle of plants in India and Mexico. Quarterly Journal of Economics, 129(3), 1035–1084. https://doi.org/10.1093/qje/qju014.

    Article  Google Scholar 

  39. Hsieh, C.-T., & Olken, B. A. (2014). The missing “missing middle”. Journal of Economic Perspectives, 28(3), 89–103. https://doi.org/10.1257/jep.28.3.89.

    Article  Google Scholar 

  40. Koenker, R., & Hallock, K. F. (2001). Quantile regression. Journal of Economic Perspectives, 15(4), 143–156. https://doi.org/10.1257/jep.15.4.143.

    Article  Google Scholar 

  41. La Porta, R., & Shleifer, A. (2014). Informality and development. Journal of Economic Perspectives, 28(3), 109–126. https://doi.org/10.1257/jep.28.3.109.

    Article  Google Scholar 

  42. Lee, S. (2014). The relationship between growth and profit: Evidence from firm-level panel data. Structural Change and Economic Dynamics, 28, 1–11. https://doi.org/10.1016/j.strueco.2013.08.002.

    Article  Google Scholar 

  43. McKelvie, A., & Wiklund, J. (2010). Advancing firm growth research: a focus on growth model instead of growth rate. Entrepreneurship Theory and Practice, 34(2), 261–288. https://doi.org/10.1111/j.1540-6520.2010.00375.x.

    Article  Google Scholar 

  44. McKenzie, D., & Sansone, D. (2019). Predicting entrepreneurial success is hard: evidence from a business plan competition in Nigeria. Journal of Development Economics, 141. https://doi.org/10.1016/j.jdeveco.2019.07.002.

  45. Moschella, D., Tamagni, F., & Yu, X. (2019). Persistent high-growth firms in China’s manufacturing. Small Business Economics, 52(3), 573–594. https://doi.org/10.1007/s11187-017-9973-4.

    Article  Google Scholar 

  46. Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge: Belknap Press.

    Google Scholar 

  47. Nichter, S., & Goldmark, L. (2009). Small firm growth in developing countries. World Development, 37(9), 1453–1464. https://doi.org/10.1016/j.worlddev.2009.01.013.

    Article  Google Scholar 

  48. Oliveira, B., & Fortunato, A. (2006). Testing Gibrat’s law: empirical evidence from a panel. International Journal of Economics and Business, 13(1), 65–81. https://doi.org/10.1080/13571510500519996.

    Article  Google Scholar 

  49. Oliveira, B., & Fortunato, A. (2008). The dynamics of the growth of firms: evidence from the services sector. Empirica, 35(3), 293–312. https://doi.org/10.1007/s10663-008-9065-4.

    Article  Google Scholar 

  50. Parker, S. C., Storey, D. J., & van Witteloostuijn, A. (2010). What happens to gazelles? The importance of dynamic management strategy. Small Business Economics, 35, 203–226. https://doi.org/10.1007/s11187-009-9250-2.

    Article  Google Scholar 

  51. Penrose, E. T. (1959). The theory of the growth of the firm. Oxford, UK: Oxford University Press.

  52. Peteraf, M. A. (1993). The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal, 14, 179–191. https://doi.org/10.1002/smj.4250140303.

    Article  Google Scholar 

  53. Petersen, M., & Rajan, R. (1994). The benefits of lending relationship: evidence from small business data. The Journal of Finance, 49, 3–37. https://doi.org/10.1111/j.1540-6261.1994.tb04418.x.

    Article  Google Scholar 

  54. Powell, D. (2016). Quantile regression with nonadditive fixed effects. Rand Corporation working paper.

  55. Rijkers, B., Arourib, H., Freund, C., & Nucifora, A. (2014). Which firms create the most jobs in developing countries? Evidence from Tunisia. Labour Economics, 31, 84–102. https://doi.org/10.1016/j.labeco.2014.10.003.

    Article  Google Scholar 

  56. Sandefur, J. (2010). On the evolution of firm size distribution in an African economy. CSAE Working Paper, 5.

  57. Schwab, D., & Werker, E. (2018). Are economic rents good for development? Evidence from manufacturing sector. World Development, 112, 33–45. https://doi.org/10.1016/j.worlddev.2018.07.014.

    Article  Google Scholar 

  58. Shiferaw, A., & Bedi, A. S. (2013). The dynamics of job creation and job destruction in an African economy: Evidence from Ethiopia. Journal of African Economies, 22(5), 651–692. https://doi.org/10.1093/jae/ejt006.

    Article  Google Scholar 

  59. Shehzad, C. T., De Haan, J., & Scholtens, B. (2013). The relationship between size, growth and profitability of commercial banks. Applied Economics, 45(13), 1751–1765. https://doi.org/10.1080/00036846.2011.637896.

    Article  Google Scholar 

  60. Sleuwaegen, L., & Goedhyus, M. (2002). Growth of firms in developing countries: evidence from Côte d’Ivoire. Journal of Development Economics, 68, 117–135. https://doi.org/10.1016/S0304-3878(02)00008-1.

    Article  Google Scholar 

  61. Teruel-Carrizosa, M. (2010). Why do SMEs grow? A rejection of Gibrat’s law for Spanish firms (1994-2002). In H. Lenihan, B. Andreosso-O’Callaghan, & M. Hart (Eds.), SMEs in a Globalised World: Survival and Growth Strategy on Europe’s Geographical Periphery. UK: MPG Books Group.

    Google Scholar 

  62. Tornqvist, L., Vartia, P., & Vartia, Y.-O. (1985). How should relative changes be measured? American Statistician, 39(1), 43–46. https://doi.org/10.2307/2683905.

    Article  Google Scholar 

  63. Tybout, J. R. (2000). Manufacturing firms in developing countries: how well do they do and why. Journal of Economic Literature, 38, 11–44. https://doi.org/10.1257/jel.38.1.11.

    Article  Google Scholar 

Download references

Acknowledgments

We would like to thank Bérénice Hiniger, Stjepan Srhoj and two anonymous referees for their useful comments. Any errors are our own. The manuscript previously circulated under the title “The elusive quest for high-growth firms in Africa: The (lack of) growth persistence in Senegal”.

Funding

This research was supported by the Agence Nationale de la Recherche of the French government through the program ‘Investissements d’avenir’ (ANR-10-LABX-14-01), through the IDGM + initiative led by Ferdi (Fondation pour les Etudes et Recherches sur le Développement International).

Author information

Affiliations

Authors

Corresponding author

Correspondence to Florian Léon.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

ESM 1

(DOCX 237 kb)

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Léon, F. The elusive quest for high-growth firms in Africa: when other metrics of performance say nothing. Small Bus Econ (2020). https://doi.org/10.1007/s11187-020-00407-y

Download citation

Keywords

  • Firms
  • Growth paths
  • Africa
  • Senegal
  • High-growth firms

JEL classifications

  • G21
  • O16
  • L26