Abstract
This paper examines firm growth dynamics in natural resource industries. In these industries, innovation is mainly based on processes in the form of incremental changes, and adoption of innovations has significant sunk costs. We argue that, in a steady state before an incremental process innovation, firm growth is directly proportional to firm size. However, in the presence of incremental innovation events firm growth is indirectly proportional to firm size, since smaller firms pose higher strategic flexibility and are able to adopt innovations faster. Our findings confirm the dependency of growth rate on firm size, highlighting the relevance of incremental innovation as a determinant factor of firm growth, rejecting Gibrat’s Law of Proportionate Effect.
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