Small Firm Growth: What I Think We Know; Don’t Know, and Should Know

Per Davidsson Australian Centre for Entrepreneurship Research (ACE)

Queensland University of Technology

1. What we know

• Not all (young/small/independent) firms can grow; will grow; should

grow, or even want to grow

• What they say they want matters

• Growth is not a homogenous phenomenon

• Growth is not random

• However, it is definitely not deterministic, either

• Growth is not necessarily “good performance”

Not all…grow

Derbyshire, J., & Garnsey, E. (2014). Firm growth and the illusion of randomness. Journal of Business Venturing Insights, 1, 8-11.

Not all … grow:

Perceived Barriers to Growth (third year follow-up of several thousand ‘genuine start-ups’)

• Fierce competition 40%

• Insufficient profitability 40%

• Insufficient demand 38%

• Lack of external equity 26%

• Lack of bank loans 19%

• Lack of management skills 9%

Ergo: Not all firms have growth potential

Not all…grow: Gray (1990; survey; UK)

• Proportion of owner-managed firms that see employment growth as

an important goal:

0%

Not all…grow: The willingness to grow

• PSED & International counterpart studies (nascent entrepreneurs)

– “Want to grow as large as possible” ~20%

– “Want to stay small and manageable” ~80%

– And they typically achieve less than they say they want

• Expected consequences of growth & overall growth willingness

(Wiklund et al., 2003)

Expected consequences regarding:

Own workload Own work tasks Owner-manager

income Sense of independence Sense of supervisory

control Employee well-being Crisis vulnerability Product/Service Quality

Overall Growth Willingness

Wiklund, Davidsson & Delmar (2003). Three large survey studies of established SMEs with 2-50 employees

What they say they want matters

• Delmar, F., & Wiklund, J. (2008). The effect of small business

managers’ growth motivation on firm growth: A longitudinal study.

Entrepreneurship Theory and Practice, 32(3), 437-457.

• Wiklund, J., & Shepherd, D. (2003). Aspiring for, and achieving

growth: the moderating role of resources and opportunities. Journal

of Management Studies, 40(8), 1911-1941.

• Baum, J. R., & Locke, E. A. (2004). The relationship of

entrepreneurial traits, skill, and motivation to subsequent venture

growth. Journal of Applied Psychology, 89(4), 587-598.

T2

Supported

Supported

Supported

Supported for empl. growth

Delmar & Wiklund (2008)

Wiklund & Shepherd, 2003

Venture Growth

(H4b) .22*

(H4a) .28*(H1a) .08

(H3a) .22*

(H1c) .11

(H3c) .26*

(H1b) .05

-.03

-.07

.17*

(H8b) .21*

(H3b) .34*

(H2a) .06

(H2b) .14*

(H8a) .24*

(H8c) .19*

(H5a) .13*

(H7a) .14*

(H6a) .23*

(H5b) .12*

(H7b) .15*

(H6b) .22*Past Venture

Growth+

Size+

Age+

Tenacity

Passion

New

Resource Skill

Communicated

Vision

Goals

Self-efficacy

Regional

Munificence+

.08

Baum & Locke, JAP, 2004

R2 = 0.35

Growth is not a homogenous phenomenon

• Sales$ – Employment – Assets – Capacity – Production volume

• ‘Mere’ volume expansion – Diversification – Integration

• Organic – Acquisitions

• Domestic – International

• Percent or Absolute numbers

• Change in Amount vs. Process

Growth is not a homogenous phenomenon

Shepherd, D., & Wiklund, J. (2009). “Are we comparing apples with apples or apples with oranges? Appropriateness of knowledge accumulation across growth studies”. Entrepreneurship Theory and Practice, 33(1), 105-123.

• Correlations across growth indicators and within indicators over time are low in many instances

• Employment growth shows better concurrent validity than sales growth

Delmar, F., Davidsson, P., & Gartner, W. (2003). Arriving at the high-growth firm. Journal of Business Venturing, 18(2), 189-216.

• Proportion of the population that is included among the “top 10% growers” according to 1-6 growth measures: 1) 41%; 2) 25%; 3) 17%; 4) 9%; 5) 6%; 6) 2.5% (organic vs. total empl; sales; absolute vs. relative)

• Clustering according to 19 indicators of the pace, regularity and type of growth yielded not one homogenous set of “gazelles” but seven different types of “high growth firms”

Growth is not a homogenous phenomenon

Hence we need to:

• Be very careful with how “growth” is conceptualized and

operationalized Davidsson, P., & Wiklund, J. (2000). Conceptual and empirical challenges in the study of

firm growth. In D. Sexton & H. Landström (Eds.), The Blackwell Handbook of

Entrepreneurship (pp. 26-44). Oxford, MA: Blackwell Business.

• Develop and test hypotheses pertaining to specific forms or

modes of growth McKelvie, A., & Wiklund, J. (2010). Advancing firm growth research: a focus on growth

mode instead of growth rate. Entrepreneurship Theory and Practice, 34(2), 261-288.

EXAMPLES

Organic Growth, t1

Acquisition-based Growth, t1

Organic Growth, t2

-

+

Interplay of Organic and Acquisition-based Growth over Time

Lockett, A., Wiklund, J., Davidsson, P., & Girma, S. (2011). Organic and Acquisitive Growth: Re-examining, Testing and Extending Penrose's Growth Theory. Journal of Management Studies, 48(1), 48-74.

Sales Growth Employment Growth

Transaction Costs - Search - Bargaining - Enforcement

Environmental munificence

Interplay of Sales and Employment Growth by Context

Chandler, G. N., McKelvie, A., & Davidsson, P. (2009). Asset specificity and behavioral uncertainty as moderators of the sales growth--Employment growth relationship in emerging ventures. Journal of Business Venturing, 24(4), 373-387.

International Knowledge Acquisition

Entrepreneurial Growth Domestically - New Product - New Markets

Firm Age

Interplay of International and Domestic [Entrepreneurial] Growth

Entrepreneurial Growth Internationally - New Product - New Markets

Naldi, L., & Davidsson, P. (2013). Entrepreneurial growth: The role of international knowledge acquisition as moderated by firm age. Journal of Business Venturing., 29(5), 687-703.

Growth is not random

As implied by:

• Gibrat’s Law

• Recent papers by Coad, Frankish & Storey

• Low R2 values in many studies

Firm age No. of cases

(n)

Cumulative total

employment growth

Cumulative organic

employment growth

Organic as

percent

of total

< 5 years 490 19 168 16 361 85.4

5-9 years 226 28 158 21 479 76.3

10+ years 437 137 938 22 200 16.1

Total 1153 185 264 60 040 32.4

1996 size

class

No. of

cases (n)

Cumulative total

employment growth

Cumulative organic

employment growth

Organic as

percent

of total

20-49 342 8124 7963 98.0

50-249 532 44 320 34 208 77.2

250-499 127 22 340 12 497 55.9

500-2499 127 57 752 15 682 27.2

2500+ 25 52 728 -10 310 (-19.6)

Total 1153 185 264 60 040 32.4

Table 7:1 Total and organic growth for high growth firms of different age (cf. Davidsson & Delmar, 1998; 2006)

Table 7:2 Total and organic growth for high growth firms of different (1996) size (cf. Davidsson & Delmar, 1998; 2006)

What they say they want matters

• Delmar, F., & Wiklund, J. (2008). The effect of small business

managers’ growth motivation on firm growth: A longitudinal study.

Entrepreneurship Theory and Practice, 32(3), 437-457.

• Wiklund, J., & Shepherd, D. (2003). Aspiring for, and achieving

growth: the moderating role of resources and opportunities. Journal

of Management Studies, 40(8), 1911-1941.

• Baum, J. R., & Locke, E. A. (2004). The relationship of

entrepreneurial traits, skill, and motivation to subsequent venture

growth. Journal of Applied Psychology, 89(4), 587-598.

Remember this?

Random?

Derbyshire, J., & Garnsey, E. (2014). Firm growth and the illusion of randomness. Journal of Business Venturing Insights, 1, 8-11.

-100000

-80000

-60000

-40000

-20000

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40000

60000

80000

1988 1989 1990 1991 1992 1993 1994 1995 1996

Year

Ab

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Control group

Total

Growing your way through financial crisis

2008 2009 2010

Growth strategies vary with

macroeconomic conditions

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10

15

20

25

30

35

40

45

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Growth is not random

• “It is indeed impossible to predict the growth and decline of new and small

firms as the originators of GRT imply. However, this is not because running

a new firm is analogous to gambling, it is because the performance of new

firms is subject to deterministic chaos. This does not imply that variations in

firm resources and entrepreneurial skill do not affect performance.”

(Derbyshire & Garnsey, 2014)

• I do not fully agree. However, their data illustrate that we have every reason

to expect a very low R2 if we assume normal distribution of the DV and use

a simplistic model to predict one arbitrary indicator of “growth” over one time

period across the total population of (mostly non-growing) firms, or a

random sample from that heterogeneous population.

• The problem of unmeasured heterogeneity – the Z variables are correlated with both X’ and Y’

• The problem of causal heterogeneity – the direction, form, strength or structure of X – Y relationships is variable

• The problem of instrument inequivalence – measurement error in X’ or Y’ or both is different for different sub-populations

X

X’

Y

Y’

Z

However, it is certainly not deterministic

Levie, J., & Lichtenstein, B. B. (2011). A terminal assessment of stages theory: Introducing a dynamic states approach to entrepreneurship. Entrepreneurship Theory and Practice, 34(2), 317-350.

Growth is not necessarily good for the firm

• Strong tendency, especially in entrepreneurship research, to use

growth as sole DV and interpret it as success (Davidsson et al.,

2007)

• Size +Survival (many studies)

• Growth ?Survival (Coad et al., 2013; Delmar et al., 2013)

• Growth ?Profitability (Capon et al., 1990; Davidsson et al., 2009)

• “relative sales growth, the most widely used measure of growth,

shows no convergent validity to any other performance measure,

regardless of industry and regardless of firm age” (Kiviluoto, ERD,

2013)

Growth Quartile

1 2 3 4

1 Poor Growth

2

3

Middle

Profit

Quartile

4 Profit Star

Interplay of Growth in Sales vs. Profitability

Davidsson, Steffens & Fitzsimmons (2009, JBV + ETP)

What we don’t know (enough about)

• All of the above, of course…

• Especially, differences across different forms/modes/types of growth

• Growth as a management issue:

– Actionable antecedents and consequences of

– Specific forms/modes/types of growth

• Role of employees in growth

– Antecedent and consequences

• Growth patterns; growth as process (cf. Wright & Stigliani, 2013,

ISBJ)

• The role of context (ditto)

– Beyond multiplicative moderator variables

What I think we should do

• Theorize and examine antecedents and effects of

particular forms/modes/types of growth (and their inter-

relationships)

• Integrate insights from related literatures, e.g.,

internationalization; diversification; M & A; organizational

change

What I think we should do

• Avoid using: – An undifferentiated conceptualization of “growth”

– Single, arbitrary or cherry-picked indicators of growth

– Full populations or random samples where doing so does not match the research question

– An assumption of a normally distributed DV

• Study growth in “narrow” contexts (Baum & Locke, 2005) – Less unmeasured heterogeneity

– Less causal heterogeneity

– Better operationalizations

• Generalize based on patterns across well-designed studies in different contexts; not based on “statistical significance” in a single, heterogeneous population

Thanks!