Threshold of Gibrat's law and firm's growth strategy

Abstract

Early research on the relationship between firm size and growth has generally drawn dichotomous conclusions either supporting or rejecting Gibrat's law. Recently, empirical evidence indicates rejection of Gibrat's law for small firms and its acceptance for large ones. However, this does not provide an accurate threshold for where Gibrat's law works differently, nor does it consider how the growth strategy should change across threshold size. This study aims: 1) to estimate the accurate threshold size if the relationship between firm size and growth is non-linear; 2) analyse the change in a firm's growth strategies across the threshold size. We estimate threshold regression using panel data of Korean manufacturing firms. The results show that the threshold is located around sales of 23 million dollars. Moreover, R&D collaborations become important for growth above the threshold, while diversification and affiliation to a large corporate group contributes to growth below the threshold.