What characterizes a fast-growing Firm?

Download article

When talking about new firms, their potential to create additional employment or their e. orts to create new and better products and services are often mentioned.

New firms are a driving force in overcoming existing economic structures (transformation from an industrial to a service economy). Moreover, new high-tech firms in manufacturing and business-related services provide new technological know-how. However, expectations that the employment created by new firms is a solution to high unemployment have been  xaggerated. Various recent studies found that the employment creation potential of young firms is about one-third in contrast to two-thirds for established firms (Storey, 1994). Moreover, Rajan and Zingales (1998) find that that two-thirds of the growth in industry comes from growth in the size of existing firms, and about one-third from the creation of new firms (using a sample of 43 countries during the 1980s) . These results contradict those found by Birch (1979), where new US firms create the majority of employment. The Birch studies have been criticized for methodological deficiencies (Davis et al ., 1996) but gave way to a series of empirical studies that deal with the employment creation potential of new firm and businesses (see, for Germany, Boeri and Cramer, 1991; Wagner, 1994). Another fact to be mentioned in connection with the growth aspiration of new firm is that formost start-ups employment growth is not an objective. For example, about 50% of UK founders start their firm with no intention to grow (Storey, 1994). Looking at both the job creation potential and the relatively low propensity of new firms to grow, it is interesting to focus attention on the small number of fast-growing firms that exist in every economy and to find characteristics that hamper or promote fast growth.

This study makes a methodological and explorative attempt to contribute to this line of research (the role played by fast-growing firms) and closes the gap which still exists between theory and practice (empirical applications). But before the empirical analysis starts we must answer the question: What is a fast-growing firm? This question initially leads to a trade-o. between the importance of absolute and relative growth rates and moreover between the growth potential of larger and smaller firms. Many studies dealing with the fast growth of firms observe the distribution of employment or sales growth and take the upper 10% of the respective distribution (Storey, 1996; Lessat and Woywode, 1999; BuÈ rgel et al ., 2000). This is motivated by the fact that only a few firms create the majority of employment. For example, Storey (1994) mentions that 4% of the fast-growing firms in his sample create about 50% of the employment in this cohort over a decade. These measures favour small firms since these must grow faster in relative terms to reach the minimum e. cient scale (MES) of production in their industry that enables them to survive (Sutton, 1997). Thus, using these growth measures to identify fast-growing firms would imply a bias towards small firms. A complete concentration on absolute growth measures in the change of employees on the contrary leads to a bias towards large firms.