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Modelling Small Business Growth and Profitability

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Author Info
 Roper, Stephen

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Abstract

This paper develops a simple structural model relating small business performance to firms' market position and the characteristics of their owner-managers. Attention focuses on two questions: What determines firms' choice of business strategy? And, how does strategy choice change subsequent business performance? Taking into account both relationships, the paper examines the links between the performance of a large group of Irish small businesses over the 1993-94 period and their market and owner-managers' characteristics in 1991. The analysis suggests three main empirical results. First, firms' turnover growth and return on assets are only weakly related in the short-term; above average growth rates are therefore no guarantor of high profitability. Moreover, a number of characteristics of firms' market position and their owner-managers are found to have the opposite effects on profitability and growth rates. Secondly, our data provides no evidence of the persistence of turnover growth rates above or below the average. Above average profit rates were also found to persist only in the very short term. Thirdly, small firm performance is shown to depend strongly on strategy choice, with turnover growth being particularly strategy dependent. This highlights the importance for small firms of making the correct strategy choices, a point emphasised by the negative profitability and growth effects of some strategy choices. One strategy choice that had positive effects on both profitability and growth was the development of new export markets. Copyright 1999 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Small Business Economics.

Volume (Year): 13 (1999)
Issue (Month): 3 (November)
Pages: 235-52
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Handle: RePEc:kap:sbusec:v:13:y:1999:i:3:p:235-52

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  1. Roper, S. & Dewitt-Dundas, N., 1998. "Grant Assistance and Small Firm Development in Northern Ireland and Republic of Ireland," Working Papers NIERC. 38, Economic Research Institute of Northern Ireland. [Downloadable!]
  2. Sijbren Cnossen & Erns Verwaal, 2001. "Europe`s new border taxes," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Zélia Serrasqueiro, 2009. "Growth and Profitability in Portuguese Companies: a Dynamic Panel Data Approach," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 11(26), pages 565-573, June. [Downloadable!]
  4. T Quince, 2001. "Entrepreneurial Collaboration: Terms of Endearment or Rules of Engagement?," ESRC Centre for Business Research - Working Papers wp207, ESRC Centre for Business Research. [Downloadable!]
  5. Roper, Stephen & Hewitt-Dundas, Nola, 1999. "Grant Assistance and Small Firm Development in Northern Ireland and the Republic of Ireland," ERSA conference papers ersa99pa396, European Regional Science Association. [Downloadable!]
    Other versions:
  6. Alfonso, Galindo Lucas, 2006. "Repercusiones de la definición de tamaño empresarial en los resultados empíricos sobre eficiencia y financiación
    [Repercussions of firm size definition on empirical results for firm efficiency     ," MPRA Paper 4731, University Library of Munich, Germany, revised 05 Sep 2007. [Downloadable!]
  7. Stephen Roper, 2004. "Job Creation and Destruction in Northern Ireland - 1973-1993," The Economic and Social Review, Economic and Social Studies, vol. 35(2), pages 183–218. [Downloadable!]
    Other versions:
  8. Verwaal, E. & Donkers, A.C.D., 2001. "Customs-Related Transaction Costs, Firm Size and International Trade Intensity," Research Paper ERS-2001-13-MKT Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
    Other versions:
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