ABSTRACT
Western countries are said to be experiencing a shift from a managerial to an entrepreneurial economy (Audretsch and Thurik, 2001), implying that we are currently in the age of the young firm (Jovanovic, 2001). If young firms play the part in economic renewal currently attributed to them, the study of their growth needs a sound conceptual base for empirical research. However, we know remarkable little about this category of young firms. Most theories of the firm are built on evidence of the long-established large managerial firm (cf. Chandler, 1990; Jensen and Meckling, 1976; Williamson, 1985). A theory of the growth of the new entrepreneurial firm has hardly been developed. There has been some fragmented research on new and young firms: in industrial economics on the post-entry performance of firms (e.g. Audretsch and Mata, 1995; Caves, 1998), in small business economics on the determinants of small firm growth (e.g. Barkham et al., 1996; Storey, 1997a; Almus and Nerlinger, 1999), and in organization studies on the life cycle of firms (Greiner, 1972; Kazanjian and Drazin, 1989). However, empirical studies on firm growth and theoretical studies on life cycles of firms overdetermine the explanation of (young) firm growth. This is in contrast to studies that are based on neoclassical theories of the firm, which regard corporate growth as random. Based on the standard textbook (neoclassical, production-function-based) theories of the firm, we should expect random corporate growth rates. Predictions on the size (and growth) of the firm are conditional on various exogenous variables, and it follows that variations in the latter over time drive variations in the former (Geroski, 2005). Even if we assume rational expectations, the essential randomness of environmental changes will cause changes in firm size that are largely, if not completely, unpredictable (Geroski, 2005). If firm size follows a random walk, firm growth is random and unpredictable (Geroski, 2005). This is supported by several empirical studies that appear to confirm Gibrat’s Law of Proportionate Growth (see Gibrat, 1931; Sutton, 1997), a descriptive relationship between size and growth. It holds that the size of units and measures of percentage growth are statistically independent. In the context of industrial
organization this means that growth rates should be independent of firm size. But there are many disparities in the empirical findings on Gibrat’s Law, which make the assumed randomness of corporate growth less indisputable than neoclassical theories propose (Botazzi et al., 2002; Reichstein and Dahl, 2004).
