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An empirical examination of firm growth in the MENA region through the lens of Gibrat’s law

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Abstract

This study investigates firm growth in the Middle East and North African (MENA), a region which is relatively under studied. Our data consists of firms listed on the regional United Arab Emirates (UAE) stock exchanges, which constitute an emerging market with smaller and less developed exchanges than most Western countries. Empirical results reveal that smaller firms grew faster than larger firms with three exceptions. These occurred in energy, telecommunications, and industrial manufacturing sectors, which also exhibit higher firm ownership concentration and significant institutional ownership. In addition, firms with higher ownership concentration also exhibited a cashflow that is statistically significant in increasing firm growth. This finding is consistent with economic theories on the reduced agency costs and higher efficiencies associated with concentrated ownership. These findings contribute to the scholarly literature on growth as they extend the discussion to the drivers of growth in different institutional contexts.

Plain English Summary

This study examines the relationship between firm size and growth in the under studied Middle East and North African (MENA) region. Results suggest that similar to previous studies on Western firms, smaller firms grow faster than larger ones in the MENA region, with three notable industry exceptions. Firms in energy, telecommunications, and industrial manufacturing sectors show no clear relationship between size and growth. These industries also exhibit both higher ownership concentration and significant state ownership, which theory suggest may lead to lower agency costs, greater efficiency, and thus higher growth. Findings are significant for research and policy studies on firm growth and suggest that financing and governance structures may play a surprisingly important role in firm growth patterns.

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Notes

  1. Sutton’s (1997, p.40) “Gibrat’s Legacy” interprets the law as an “expected value of the increment firm’s size in each period is proportional to the current size of the firm.”

  2. In 2004, the Freezone International Financial Centre was founded in the Emirate of Dubai, but with its own separate legal system based on the common law of England and Wales. The aspiration was to become one of the large global financial hubs, bridging the time gap between New York, London, Singapore, and Tokyo. This ambition did not materialize, and the new stock exchange, DIFX (now Nasdaq Dubai), has subsequently merged with the DFM (Vincke, 2014).

  3. All log variable transformations use the natural log.

  4. Some growth studies (Arouri et al., 2020) also use firm age to explain growth. This study does not because Audretsch and Elston (2006) show that age becomes statistically insignificant when cash flow enters the growth model. We believe that the impact of age may in simply reflect the superior access of older firms to capital, which is better measured by cash flow.

  5. There is evidence from 1970 to 1984 that larger firms grew faster than smaller ones in Germany; however, once the Neuer Markt was introduced in 1997, for the first time, smaller firms grew faster than larger firms (Audretsch et al., 2004; Audretsch & Elston, 2006). This constitutes further evidence that local institutions particularly financial institutions impact the size-firm relationship.

  6. The size-squared term was intentionally omitted from the modified model due to a high variance inflation factor (VIF) value indicating multicollinearity problems when included in the model.

  7. See provisions of UAE Federal Decree-Law No. 26 of 2020 amending the provisions of the former 2015 Federal Law No. 2 of 2015 on Commercial Companies.

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Acknowledgements

We gratefully acknowledge the insightful input of the two referees who provided critical input on an earlier version of this paper. We also appreciate the constructive feedback from conferences participants at the 8th International Conference on Restructuring of the Global Economy (ROGE), 2018 University of Oxford, UK, and support from the Central Bank of the UAE.

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Authors and Affiliations

  1. Oregon State University, 1500 Chandler Way, Bend, OR, 97701-5998, USA

    Julie Ann Elston

  2. United States Agency for International Development, Monrovia, Liberia

    Alois Weidinger

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  1. Julie Ann Elston
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  2. Alois Weidinger
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Correspondence to Julie Ann Elston.

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Appendix A

Appendix A

Table 6

Table 6 Correlation analysis
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Graph 1
figure 1

Total assets of UAE market 1996–2016

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Graph 2
figure 2

UAE market capitalization 1996–2016

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Elston, J.A., Weidinger, A. An empirical examination of firm growth in the MENA region through the lens of Gibrat’s law. Small Bus Econ 60, 121–131 (2023). https://doi.org/10.1007/s11187-022-00640-7

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