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The Growth of Firms in Theory and in Practice

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  • Geroski, Paul A

Abstract

This paper is a reflective survey of past and recent econometric work on the growth of firms. Most of this work suggests that firm size follows a random walk; i.e. that corporate growth rates are random. The survey documents this, and shows what a strong result this is by contrasting it with several alternative (and rather obvious) models which might be used to explain corporate growth rates but which are basically inconsistent with the data. The survey also discusses complementary evidence on corporate innovation rates and adjustment costs in investment/employment decisions which is consistent with (and therefore provide some support for) these results. This particular result is striking for a number of reasons, not least because it is basically inconsistent with most theories of the growth of firms which have be developed over the years. It is also inconsistent with the recently fashionable resource based theory of the firm. The second half of this essay identified how and why these theories of growth seem to be inconsistent with the data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2092.

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Date of creation: Mar 1999
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Handle: RePEc:cpr:ceprdp:2092

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Keywords: Gibrat's Law; Growth;

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References

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  1. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March.
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  4. Moore, John, 1992. "The firm as a collection of assets," European Economic Review, Elsevier, vol. 36(2-3), pages 493-507, April.
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  6. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
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  11. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
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  14. Geroski,Paul A. & Gregg,Paul, 1997. "Coping with Recession," Cambridge Books, Cambridge University Press, number 9780521626019, October.
  15. Malerba, Franco & Orsenigo, Luigi, 1995. "Schumpeterian Patterns of Innovation," Cambridge Journal of Economics, Oxford University Press, vol. 19(1), pages 47-65, February.
  16. Mueller, Dennis C, 1972. "A Life Cycle Theory of the Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 20(3), pages 199-219, July.
  17. Geroski, Paul A & Machin, Stephen & Walters, Christopher F, 1997. "Corporate Growth and Profitability," Journal of Industrial Economics, Wiley Blackwell, vol. 45(2), pages 171-89, June.
  18. Chandler, Alfred Jr., 1992. "What is a firm? : A historical perspective," European Economic Review, Elsevier, vol. 36(2-3), pages 483-492, April.
  19. Hart, Peter E & Oulton, Nicholas, 1996. "Growth and Size of Firms," Economic Journal, Royal Economic Society, vol. 106(438), pages 1242-52, September.
  20. Hamermesh, Daniel S & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  21. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August.
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