Firm growth in the 21st century: Does the Andalusian economy comply with Gibrat’s Law?

Abstract

Gibrat’s Law – also called law of proportionate effect – states that the size of a company does not influence its economic growth. The present article aims at testing the validity of this law on all companies based in the autonomous region of Andalusia (Spain). The study uses data on employment compiled by the Instituto de Estadística y Cartografía de Andalucía for every company belonging to the two-digit NACE code, with yearly data for the 2000 to 2015 period: 7,046,539 firms in total. The results obtained allow to identify by sector the impact of size on business growth, to check compliance in this relevant region of the European Union and analyse the influence of the recent economic/financial crisis in terms of Gibrat’s Law validation. In general terms, the degree of compliance with the law is limited in the analysed period, even more so in the years of economic crisis. We have fitted the double Pareto log-normal distribution to our data. That distribution fits well the firm’ size distribution in many sectors of the Andalusian economy. Thus, these sectors would follow a Yule process. At the aggregate level, the sectors of the Andalusian economy that comply with Gibrat’s law also follow a Yule process.