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Limit's to a Firm's Rate of Growth: the Richardsonian View and its Contemporary Empirical Significance

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  • Gavin C Reid

Abstract

The work of the Oxford Economic Research Group under the chairmanship of George Richardson is taken as the starting point for a new analysis of the limits to small firm growth. Following Richardson's emphasis on costs of organisational change within the growing firm, caused by the need to train and assimilate new managerial recruits, a transactional efficiency explanation is developed emphasising three small business types: sole proprietorship; partnership; and private company. These types are identified from a contemporary database of new small firms, and their growth and performance characteristics are compared both by descriptive statistics and econometric evidence. The importance of business type to the growth/profitability trade-off relationship is confirmed, thus supporting Richardson's analysis. More complex organisational forms reduce short-term performance. A new finding is the additional importance of capital structure to this trade-off: higher geared firms experience lower growth and lower profits than lower geared firms. this effect can be explained by costs of debt servicing and exposure to risk.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9426.

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Date of creation: Oct 1994
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Handle: RePEc:san:crieff:9426

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Related research

Keywords: George Richardson; grounded theory; growth/profitability trade-off;

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References

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  1. Gavin C Reid & Lowell R Jacobsen., . "The Small Entrepreneurial Firm," Hume Papers 8, David Hume Institute.
  2. Richard N. Langlois, 1995. "Capabilities and the Theory of the Firm," Industrial Organization 9503002, EconWPA.
  3. Evans, David S., 1986. "Tests of Alternative Theories of Firm Growth," Working Papers 86-36, C.V. Starr Center for Applied Economics, New York University.
  4. Dobson, Stephen M & Gerrard, Bill J, 1989. "Growth and Profitability in the Leeds Engineering Sector," Scottish Journal of Political Economy, Scottish Economic Society, vol. 36(4), pages 334-52, November.
  5. Richardson, G B, 1972. "The Organisation of Industry," Economic Journal, Royal Economic Society, vol. 82(327), pages 883-96, September.
  6. Slater, Martin, 1980. "The Managerial Limitation to the Growth of Firms," Economic Journal, Royal Economic Society, vol. 90(3593), pages 520-28, September.
  7. Gavin C Reid, 1994. "Early Life-Cycle Behaviour of Micro-Firms in Scotland," CRIEFF Discussion Papers 9410, Centre for Research into Industry, Enterprise, Finance and the Firm.
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Cited by:
  1. Bernadette Power & Gavin C Reid, 2003. "Turbulence, Flexibility and Performance of the Long-lived Small Firm," Tinbergen Institute Discussion Papers 03-039/3, Tinbergen Institute.
  2. Bernadette Power & Gavin C Reid, 2003. "Turbulence, Flexibility and Performance of the Long-lived Small Firm," Tinbergen Institute Discussion Papers 03-039/3, Tinbergen Institute.

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