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Early Life-Cycle Behaviour of Micro-Firms in Scotland

Listed author(s):
  • Gavin C Reid

This paper reports on the behaviour of young (less than three years old) micro-firms (less than ten employees) in Scotland, with an emphasis on life-cycle effects. Two main tests were carried out. The first took Gibrat's Law (that growth is independent of size) as the null hypothesis, and a life-cycle effects model as the alternative. The Gibrat's Law model was rejected in favour of the life-cycle model. Smaller micro-firms grow faster than larger micro-firms. Robust non-linear variants of the life-cycle model were discussed and shown to display stable equilibrium characteristics which were consistent with the sample evidence. the second took a Classical simultaneous equations model as the null hypothesis, for which growth and profitability were mutually reinforcing. A Managerial model was set up as the alternative for which growth and profitability were in a trade-off relationship. The Classical model was rejected in favour of the Managerial. In the short-run, young micro-firms experience a trade-off between profitability and growth. The Managerial model was shown to imply a stable equilibrium, with characteristics consistent with sample evidence.

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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 9410.

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Date of creation: Oct 1994
Handle: RePEc:san:crieff:9410
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