The Effect of Size and Institutional Development on the Growth of Brazilian Firms

In many developing countries, the size structure of firms is bimodal with a large number of small and large firms, and a missing middle. This suggests that small firms do not evolve gradually into large firms: once a size barrier is broken, firms start growing faster. Our results confirm this hypothesis for the Brazilian case. We find that large firms grow faster. Furthermore, we observe that shortcomings in institutional development, when measured in terms of corruption, inefficiency of the judicial system and lack of financial development, have a negative impact on firms’ growth. This negative impact is stronger for small firms. This last finding helps to understand why firms’ growth is positively related to size in Brazil. Finally, we also find that, as predicted by learning models, younger firms grow faster. Our results come from a unique dataset created by the World Bank (The Investment Climate Survey) comprising 1642 firms spread over 13 Brazilian states with size stratification ranging from 10 to 10500 employees. The nature of this dataset can not be overestimated, once traditional datasets based on is a small number of publicly traded firms and concentrated in some few industrial sectors are not able to unveil the nature of firm’ growth.