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Gibrat's Law and diversification

  • Giulio Bottazzi
  • Angelo Secchi

This article presents an analysis of the growth patterns of the worldwide top 200 firms in the pharmaceutical industry. A test of the Gibrat's Law of Proportionate Effect is performed and we find, in line with previous literature, a violation concerning the variance of growth. Using disaggregated data on sub-markets, we are however able to show that this violation can be completely accounted for by a diversification effect, namely a scale relation between the number of sub-markets in which a firm is active and its size. To interpret these findings, we propose a stochastic branching model of firm diversification consistent with a notion of cumulative corporate competences. Copyright 2006, Oxford University Press.

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Article provided by Oxford University Press in its journal Industrial and Corporate Change.

Volume (Year): 15 (2006)
Issue (Month): 5 (October)
Pages: 847-875

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Handle: RePEc:oup:indcch:v:15:y:2006:i:5:p:847-875
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