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Turbulence, Flexibility and Performance of the Long-lived Small Firm

Listed author(s):
  • Bernadette Power
  • Gavin C. Reid

This paper focuses on a new concern in the small firm’s literature, namely what makes a small firm stay in business for a long time. It reflects a change in economic policy, away from an emphasis on volume of start-ups to an emphasis on quality of start-ups. The basic hypothesis is that flexibility enhances the long run prospects of the small firm. This is explored by examining precipitating causes of organisational change within the small firm, and the consequential adjustments. The study is fieldwork based and uses evidence from face-to-face interviews with 63 owner managers of mature small firms in Scotland. New measures of flexibility and turbulence are used to explain the performance of mature small firms. These depend on our unique body of evidence from interviews with owner managers. Performance is measured using a Likert scale over 28 distinct attributes. Econometric estimates are reported on the relationship between flexibility, turbulence and performance. This is done in two forms. The first involves generalised least squares estimatation (with heteroskedastic adjustment) of the relationship between turbulence, four measures of flexibility, and performance. The second involves Heckman sample selection estimation, of this performance relationship. It is found that turbulence has a negative effect on performance. Further, this impact is relatively large. Next in importance are those flexibility factors which can be categorised as precipitating causes of organisational change (as opposed to consequential adjustments) within the mature small firm. Finally, trade-off relationships are found to exist between two of the measures of flexibility (viz. agility and speed). We believe that this trade-off relationship is worthy of further empirical investigation

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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0207.

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Date of creation: Feb 2002
Handle: RePEc:san:crieff:0207
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  1. Thomas VON UNGERN-STERNBERG, 1988. "The Flexibility to Switch between Different Products," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8806, Université de Lausanne, Faculté des HEC, DEEP.
  2. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  3. Julia A Smith, 1998. "Strategy Processes for Success," CRIEFF Discussion Papers 9812, Centre for Research into Industry, Enterprise, Finance and the Firm.
  4. Julia A Smith, 1997. "The Behaviour and Performance of Young Micro Firms: Evidence from New Businesses in Scotland," CRIEFF Discussion Papers 9711, Centre for Research into Industry, Enterprise, Finance and the Firm.
  5. Carlsson, Bo, 1989. "Flexibility and the theory of the firm," International Journal of Industrial Organization, Elsevier, vol. 7(2), pages 179-203, June.
  6. Gavin C Reid & Julia A Smith, 1996. "What Makes a New Business Start-Up Successful?," CRIEFF Discussion Papers 9618, Centre for Research into Industry, Enterprise, Finance and the Firm.
  7. Beesley, M E & Hamilton, R T, 1984. "Small Firms' Seedbed Role and the Concept of Turbulence," Journal of Industrial Economics, Wiley Blackwell, vol. 33(2), pages 217-231, December.
  8. James J. Heckman, 1976. "Introduction to "Annals of Economic and Social Measurement, Volume 5, number 4"," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4 National Bureau of Economic Research, Inc.
  9. Lung-Fei Lee, 1982. "Some Approaches to the Correction of Selectivity Bias," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 355-372.
  10. Gavin C Reid & Lowell R Jacobsen., "undated". "The Small Entrepreneurial Firm," Hume Papers 8, David Hume Institute.
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