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The Growth of Firms in Theory and in Practice

  • Geroski, Paul A

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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  1. Geroski, Paul A & Samiei, Hossein & Van Reenen, John, 1996. "How Persistently do Firms Innovate?," CEPR Discussion Papers 1433, C.E.P.R. Discussion Papers.
  2. Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  3. repec:cup:cbooks:9780521626019 is not listed on IDEAS
  4. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  5. Hart, Peter E & Oulton, Nicholas, 1996. "Growth and Size of Firms," Economic Journal, Royal Economic Society, vol. 106(438), pages 1242-52, September.
  6. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  7. You, Jong-Il, 1995. "Small Firms in Economic Theory," Cambridge Journal of Economics, Oxford University Press, vol. 19(3), pages 441-62, June.
  8. Geroski, Paul A, 1998. "An Applied Econometrician's View of Large Company Performance," CEPR Discussion Papers 1862, C.E.P.R. Discussion Papers.
  9. Cynthia A. Montgomery & Birger Wernerfelt, 1988. "Diversification, Ricardian Rents, and Tobin's q," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 623-632, Winter.
  10. Mueller, Dennis C, 1972. "A Life Cycle Theory of the Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 20(3), pages 199-219, July.
  11. 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.
  12. Moore, John, 1992. "The firm as a collection of assets," European Economic Review, Elsevier, vol. 36(2-3), pages 493-507, April.
  13. repec:cup:cbooks:9780521622769 is not listed on IDEAS
  14. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
  15. 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.
  16. 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.
  17. Chandler, Alfred Jr., 1992. "What is a firm? : A historical perspective," European Economic Review, Elsevier, vol. 36(2-3), pages 483-492, April.
  18. Malerba, Franco & Orsenigo, Luigi, 1995. "Schumpeterian Patterns of Innovation," Cambridge Journal of Economics, Oxford University Press, vol. 19(1), pages 47-65, February.
  19. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
  20. Ingemar Dierickx & Karel Cool, 1989. "Asset Stock Accumulation and Sustainability of Competitive Advantage," Management Science, INFORMS, vol. 35(12), pages 1504-1511, December.
  21. Elena Cefis, 1996. "Is there any persistence in innovative activities?," Department of Economics Working Papers 9606, Department of Economics, University of Trento, Italia.
  22. Garnsey, Elizabeth, 1998. "A Theory of the Early Growth of the Firm," Industrial and Corporate Change, Oxford University Press, vol. 7(3), pages 523-56, September.
  23. Slater, Martin, 1980. "The Managerial Limitation to the Growth of Firms," Economic Journal, Royal Economic Society, vol. 90(3593), pages 520-28, September.
  24. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  25. 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.
  26. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
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