Abstract
The theory of firm growth is in a rather unsatisfactory state. However, the analysis of large firm-level datasets which have become available in recent years allows us to begin building an evidence base which can, in turn, be used to underpin the development of more satisfactory theory. Here we study the 239 thousand UK private sector firms born in 1998 over their first 15 years of life. A first, and quite striking, finding is the extraordinary force of mortality. By age 15, 90% of the UK firms born in 1998 are dead, and, for those surviving to age 15, the hazard of death is still about 10% a year. The chance of death is related to the size and growth of firms in an interesting way. Whilst the hazard rate after 15 years is largely independent of size at birth, it is strongly affected by the current (age 14) size. In particular, firms with more than five employees are half as likely to die in the next year as firms with less than five employees. A second important finding is that most firms, even those which survive to age 15, do not grow very much. By age 15 more than half the 26,000 survivors still have less than five jobs. In other words, the growth paths – what we call the ‘growth trajectories’ – of most of the 26,000 survivors are pretty flat. However, of the firms that do grow, firms born smaller grow faster than those born larger. Another striking finding is that growth is heavily concentrated in the first five years. Whilst growth does continue, even up to age 15, each year after age five it involves only a relatively small proportion of firms. Finally, there are two groups of survivors which contribute importantly to job creation. Some are those born relatively large (with more than 20 jobs) although their growth rate is quite modest. More striking though, is a very small group of firms born very small with less than five jobs (about 5% of all survivors) which contribute a substantial proportion (more than one third) of the jobs added to the cohort total by age 15.
Highlights
The theory of firm growth is in a rather unsatisfactory state
Albeit somewhat crudely, one view is that firm growth can be regarded as essentially ‘random’; the alternative view is that a firm’s characteristics and its choices can have a systematic effect on its growth
We propose to make use of a relatively newly available large firmlevel dataset to begin building an evidence base which, by providing a detailed picture of growth across the UK firm population, might be used to underpin the development of more satisfactory approach to the theory of firm growth
Summary
The theory of firm growth is in a rather unsatisfactory state. a reading of some recent contributions to the literature suggests that there may be something of an impasse. Albeit somewhat crudely, one view is that firm growth (certainly in a firm’s early years) can be regarded as essentially ‘random’; the alternative view is that a firm’s characteristics and its choices can have a systematic effect on its growth Whilst these competing views provide a context for this paper, our starting point is different. For each pair of years we cross-classify firms into their size-bands in year t – these are their origins – the rows of the table, against their size-bands in year (t − 1) – these are their destinations (one of which is ‘death’) – the columns of the table, and these annual tables allow us to chart the rhythm of the growth process Complementing these annual tables, a cross-classification of sizeband at birth against size-band at age 15 provides an effective tool for organizing the data on the growth trajectories of the 26 thousand survivors.
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