ArticlePDF Available

New Firm Growth: Exploring Processes and Paths

Authors:

Abstract and Figures

This paper provides a new methodology for the diachronic study of new firm growth, theoretically grounded in the work of Penrose (1995). We show that a model of firm growth as an unfolding process makes possible draw simple, measurable inferences from firm level to aggregate evidence on growth paths of new firms, expressed as propositions. Metrics on growth paths of new firms in three longitudinal samples of new firms are examined for evidence at the aggregate level consistent with the dynamic model. Dynamic processes in the early development of young firms result in variations in the timing, magnitude, duration and rate of change of growth as between firms and in the same firm over time. The conceptual and methodological framework in this paper provides a basis for future research aimed at explaining the development of new firms.
Content may be subject to copyright.
Research Paper
New Firm Growth: Exploring
Processes and Paths
ELIZABETH GARNSEY*
,
**, ERIK STAM
{,{
& PAUL HEFFERNAN*
*Centre for Technology Management, University of Cambridge, Cambridge, UK, **Judge Business School, University
of Cambridge, Cambridge, UK,
{
Erasmus Research Institute of Management (ERIM), Rotterdam School of
Management, Erasmus University Rotterdam, the Netherlands,
{
Department of Economic Geography, University of
Utrecht, Utrecht, the Netherlands,
§
Max Planck Institute of Economics—Entrepreneurship, Growth and Public Policy
Group, Jena, Germany
A
BSTRACT This paper provides an approach to new firm growth that views this as an unfolding
developmental process. This approach is based on a Penrosean (1995) model of the firm. We find that new
firm growth is non-linear and prone to interruptions and setbacks to an extent overlooked in the literature.
From the model of development used, five propositions are drawn concerning measurable features of new
firms’ growth paths; these relate to patterns of survival, continuousness of growth, turning points, reversals
and cumulative growth. These propositions are examined in the light of data on the growth paths of new firms
in three countries, with aggregate comparisons of firms’ growth paths effected by graphical representations
and sequence analysis.
K
EY WORDS: Firm growth, growth paths, new firms, longitudinal research methods, Penrose
1. Introduction
The study of new firm growth suffers from an absence of conceptual models that can link
research at different levels of analysis so that consistent inferences can be drawn from one
level to another. Evidence from case studies of new firms provides narratives of individual
development, while aggregate analysis examines rates and trends in performance, but
aggregate and individual analysis are not used to inform each other in the current literature.
Improvement could be made by comparing consistent measures of firms’ performance and
the way these change over the course of firms’ existence. To ensure measures are
appropriate and connect empirical work at case study and aggregate levels on new firm
Correspondence Address: Erik Stam, Department of Economic Geography, Faculty of Geosciences, University of
Utrecht, PO Box 80115, 3508 TC Utrecht, the Netherlands. Fax: +31 30 2532037; Tel.: +31 30 2534436. Email:
e.stam@geo.uu.nl
Industry and Innovation,
Vol. 13, No. 1, 1–20, March 2006
1366-2716 Print/1469-8390 Online/06/010001–20 # 2006 Taylor & Francis
DOI: 10.1080/13662710500513367
growth, conceptual grounding is required. In this paper we propose an account of new firm
growth built on the work of Penrose (1995) and explore available data on the growth paths
of new firms from three samples. We find that the growth of these firms is non-linear and
prone to interruptions and setbacks to an extent overlooked in the literature. However, this
accords with what a Penrosean theory of firm growth would lead us to expect. We show this
by drawing measurable propositions from the Penrosean conceptual framework which are
then examined in the light of empirical data on the growth paths of new firms in three
countries. This work involves experimental methods which require further refinement. If new
firms play the part in economic renewal currently attributed to them (cf. Audretsch and
Thurik, 2001), the study of their growth needs a sound conceptual base at the firm level and
calls for new longitudinal methods.
2. New Firm Growth Studies
Two types of studies have dominated research on new firm growth up till now: studies of
factors associated with growth and case-oriented studies of stages of growth. Factors of
growth studies have been dominated by the analysis of variance using cross-sectional
measures to compare the attributes or conditions of new firms in samples and populations.
Attributes of firms with a successful growth record have been found in a number of studies
to include factors such as ambitious founders, a founding team rather than solo
entrepreneur, education and relevant experience among founders, willingness to share
equity, a multi-skilled management team, marketing expertise (Utterback et al., 1988;
Barkham et al., 1996; Storey, 1997a; Wiklund, 1998; Almus and Nerlinger, 1999; Cosh and
Hughes, 2000). Indicators of this kind provide a guide to desirable attributes of new firms.
However, inferences from the founding attributes of successful firms have been
questioned. Critics point out that as much as 80 per cent of sample variance is left
unexplained in some of these studies (Woo et al., 1994: 507; Curran and Blackburn, 2001:
44). Adherents have granted that prediction of performance based on start-up attributes is
weak, but hope that ‘‘once the business is in operation, forecasting improves somewhat’’
(Storey, 1997a: 159).
Integrating findings from factors of growth studies has proved a challenge. Different
samples and timeframes have come up with contradictory or inconclusive results. For
example, Storey found in his useful review that: ‘‘Five studies do not identify an impact,
three indicate that prior sectoral experience is associated with slower-growing firms, and
one suggests that prior sector experience is associated with faster-growing firms’’ (Storey,
1997a: 135). Some research suggests that long experience of the industry by founders may
inhibit innovative performance (Storey, 1997a) while other findings indicate that prior
knowledge of an industry enhances firm performance (Oakey, 1995; Shane, 2000). Storey
reported that growth firms tend to have older than average founders (1997a: 158) while
Barkham et al. (1996: 62) found younger owner-managers had faster growing firms. Some
studies find merit in a deliberate niche market strategy, exploiting a quality or technological
advantage (Storey, 1997a: 142–143). Others find that niche strategies may trap the firm
(Aldrich, 1999). Many studies found a positive correlation between product innovation and
small firm growth (see Storey, 1997a), while Freel and Robson (2004) found a negative
relationship between product innovation and growth in sales. Since many of the sample
2 E. Garnsey et al.
survey studies have low response rates and compare firms that differ in their age, industry
and business cycle timing, these inconsistencies are not surprising.
Greater consistency could be provided in factors of growth studies by studying cohorts
of comparable new firms over the same time period. This would address the charge that
factors of growth studies have drawn inappropriate inferences from survivors in samples by
excluding less successful firms. The problem of survivor bias has long been recognized but
is often disregarded (Keasey and Watson, 1993; Penrose, 1995: 7). Moreover, unless
factors and attributes held to cause success are clearly differentiated from the effects of
success, studies of this kind are open to the charge of circular reasoning (Porter, 1991:
108–109).
1
No less criticism has been directed at generalizations about growth based on studies at
the firm level. Case study evidence is not acceptable to many journals and has been
dismissed as unscientific (Kerlinger, 1986). Stage theories of growth based on case
evidence have been held to be unproven and non-predictive (Storey, 1997a: 122).
Excessive claims for invariance in stage of growth theories have led scholars to reject
the idea of any ‘‘recurring temporal sequence’’ in the development of the new firm (Bhide´,
2000: 247). The merit in growth stage studies stems from the benefits of observation at the
firm level and of identifying dynamic connections between stages (e.g. Greiner, 1972).
2
But
in many stages of growth studies unrelated concepts and over-specified phase timings
reflect observations from a particular context. There is no basis for conceptual and empirical
alignment between stage models and they confuse developmental processes and phases
of activity (Greiner, 1972; Churchill and Lewis, 1983; Kazanjian and Drazin, 1989; Churchill,
1997).
Certain developmental processes are common in new firms: to operate in a capitalist
economy, they must mobilize resources to form a resource base capable of generating
market returns. Companies that face and solve similar developmental problems in
sequence will go through similar phases of activity; firms that require an in-house
production facility, for example, have to build this before they can organize productive
activity (Garnsey, 1998). The building of different kinds of resource base involves different
kinds of activity. It may be necessary to lay down infrastructure before facilities can be used,
or, at the other extreme, resources may be rapidly mobilized to create a base for
consultancy using current knowledge. Problems may be addressed in parallel, or may recur.
Firm founders may or may not inherit a resource base from another organization through
spin-out (Klepper, 2001). There are no invariant phases of activity in new firm development
because different problems arise in different kinds of ventures and are addressed in
different ways. Nevertheless, stage approaches do have the merit of making observations
of firm’s internal dynamics. Without observations at the firm level, the mechanisms and
processes of growth remain obscure, however sophisticated the regressions and cross-
sectional analysis of variance used (Mohr, 1982). Measures of attributes drawn even from
2
The problems of setting up a firm often require sequential solutions, but growth processes do not result in universal
stages (Garnsey, 1998).
1
Penrose was well aware of the ‘‘tautological problem’’ inherent in a theory of the growth of firms concerned only with
firms that can successfully grow (1995: 7). She was not concerned with predicting the growth of a particular firm in
advance, but in understanding the mechanisms which bring about growth in more generic terms.
New Firm Growth 3
comparable firms cannot reveal the underlying mechanisms and processes that give rise to
new firm growth. Argenti articulated the problem in connection with firm failure:
a mere list of causes and symptoms, no matter how coherent and comprehensive it may be, is
not enough. What is missing from such an inventory—and indeed from all previous work in this
field—is the dynamics the sequencing of events (Argenti, 1976: 121)
Moreover, it is essential to have related explanatory concepts to guide inquiry and make
sense of evidence. A mass of undigested empirical findings can be misleading. For
example, evidence that outstanding growth occurs among only a few firms has been used
as a rationale for investing in fast growth firms. Databases are created to identify such firms,
but by excluding firms from fast track databases as soon as their performance falters, the
very evidence required to understand the experience of fast growth in a firm’s development
is eliminated.
In brief, the study of new firm growth suffers from an absence of conceptual models
that can filter and assimilate diachronic evidence (on change over time) at the firm level and
interpret this in terms of a shared discourse. Conceptual models are needed to build on prior
work and make connections between related fields of study, for example, management,
strategy, entrepreneurship, innovation and network studies.
3. A Dynamic Process Approach
Attribute and growth stage studies of new firms using rigorous methodologies have an
important contribution to make. This paper does not attempt to remedy existing approaches,
but illustrates an alternative approach to exploring growth in new firms, theoretically grounded
in the work of Penrose.
Penrose found a middle way between description and unsubstantiated generalization in
her book on the growth of the firm (1995; cf. Best and Garnsey, 1999; Kor and Mahoney,
2000; Pitelis, 2002). She identified dynamic processes by inference from detailed
observation, drawing together her inferences to build an account of the interconnected
causes of growth in established manufacturing firms. Penrose did not write about new firms,
but dynamic processes operate in new firms as they do in established firms, and shape
early growth experience, but with distinctive effects that reflect the liabilities of newness
(Hugo and Garnsey, 2005).
Penrose (1995) saw growth as a cumulative process in which the members of a firm build
knowledge and competence. Firm growth is ‘‘[…] a result of a process of development […] in
which an interacting series of internal changes leads to increases in size accompanied by
changes in the characteristics of the growing object’ (Penrose, 1995: 1). Penrose derived her
evidence from detailed study of the history of particular firms, but was able to provide an
analysis going beyond the firm-specific context. She retained her focus on internal processes
of change while emphasizing the importance of the firm’s positioning in its industrial
environment. Entrepreneurship is a key ingredient of her theory since entrepreneurial
judgement is needed to recognize market opportunities. Firm growth is driven by a ‘‘productive
opportunity’ (Penrose, 1995) in a cumulative process of interaction between the firm’s
productive base and market opportunities.
4 E. Garnsey et al.
Process-based analysis of the kind we have in mind engages in reasoning about
interconnected causes of change and growth, and attempts to identify mechanisms and
drivers of change in relation to timing and sequence (cf. McKelvey, 2004). This usage is
close to Van de Ven and Poole’s (1995) use of process theories as theories that explain
how and why change unfolds in organizations. Mohr (1982) argued that process theories
embody a flow of action in which the time ordering of events is of critical importance. In
contrast ‘‘… in a variance theory the ordering of two direct causes, X
1
and X
2
, is immaterial
in the sense that each has an independent effect on Y with the other held constant’’ (Mohr,
1982: 60). Many studies that attempt to account for variance do not inquire into the influence
of timing and sequencing on causal processes.
The importance of timing is conveyed in Penrose’s dictum that ‘‘history matters’’ in the
growth of the firm. Although useful attempts have recently been made to apply resource-
based theory to new firms (Alvarez and Busenitz, 2001; Brush et al., 2001; Lichtenstein and
Brush, 2001), the potential of Penrose’s original dynamic process approach to take into
account feedback effects remains to be explored. In the next section we draw inferences
from Penrose’s work (1995) pointing to non-linearities in new firms’ growth paths.
4. Dynamic Processes Affecting New Firms’ Growth Paths
We view the entrepreneurial process as comprising the pursuit of opportunity and the
mobilization of resources to create, deliver and capture value through business activity. For
Penrose, entrepreneurs seek to realize a ‘‘productive opportunity’’ which comprises ‘‘all of
the productive possibilities that its ‘entrepreneurs’ see and can take advantage of’’
(Penrose, 1995: 31). Opportunities are objectively identifiable but their recognition is
subjective and requires exploratory activity either before or after the formal foundation of the
new firm. To realize the opportunity it is necessary to organize business activity, which calls
for some kind of resource base. The new firm may aim at a productive base that is very
simple, as in the case of a research services company, or very complex, as in the case of a
plant or other installation. Penrose (1995) was dealing with mature firms that already had a
base of this kind. The new firm, in contrast, rarely starts out with a productive base, except
in special cases such as demerger or endowed spin-out, but has to build one from the
resources the entrepreneurs mobilize. Penrose stressed the way entrepreneurial managers
match up opportunities and resources: ‘‘The continual change in the productive services
and knowledge within a firm along with the continual change in external circumstances
present the firm with a continually changing productive opportunity’’ (Penrose, 1995: 150).
As it grows, the firm’s resources may come to support a variety of productive bases, but
Penrose pointed out that: ‘‘[…] movement into a new base requires a firm to achieve
competence in some significantly different area of technology’’ (1995: 110).
Empirical data on firm growth, whether at the case study or aggregate level, will reveal
diversity in the speed with which opportunity recognition can be translated into a functioning
resource base. We can expect diversity in the onset of growth in terms of both inputs and outputs.
Liabilities of Newness
3
Penrose explored the dynamic processes taking place in established firms that achieved
sustained growth. She identified the key to sustained growth as the ability to build a
New Firm Growth 5
resource base and adapt this base to respond to new opportunities as these arose.
Because markets and opportunities undergo change, she argued that there could be no
state of rest in the firm. New firms must mobilize resources for and generate returns from
the ‘‘particular productive activities […] chosen from among the alternatives suitable to the
abilities, finance and preferences of the entrepreneur’’ (Penrose, 1995: 82). But in practice,
abilities and preferences may not include responsiveness to new opportunities. Indeed most
small firms are run by people with modest expectations and limited access to resources who
fail to recognize or pursue new opportunities (cf. Davidsson, 1989).
It follows that if the new firm is started by entrepreneurs who settle for low or no growth,
its sales and inputs are threatened as soon as the conditions in which it operates change.
Cash constraints are a likely outcome of low or no growth in revenues. New firms are at risk
before they have been able to build the resource base.
4
In contrast, more established firms
are more likely to have ‘‘organizational slack’’ (cf. Cyert and March, 1963) that acts as a
buffer to deal with growth interruptions and for the exploitation of new opportunities. Unless
they can finance the building of a resource base themselves, new firms that run out of cash
have to turn to the financial system, which imposes criteria they may be unable to meet.
New firms often close before they have built a sustainable resource base. This leads us to
our first proposition:
Proposition 1. New firms that do not grow are more likely to close.
Dynamic Instability
If failure to grow makes firms vulnerable, those that do grow are continually challenged by
the demands of coordinating growth. Both growth inducing and growth limiting factors
create coordination problems. Penrose explicitly rejected equilibrium theories of the firm (cf.
Foss, 1997: 363). She pointed out that:
The attainment of such a ‘‘state of rest’’ is precluded by three significant obstacles: those
arising from the familiar difficulties posed by the indivisibility of resources; those arising from the
fact that the same resources can be used differently under different circumstances, and in
particular, in a ‘‘specialized’’ manner; and those arising because in the ordinary processes of
operation and expansion new productive services are continuously being created. (Penrose,
1995: 68)
4
Initial resource endowments—the stocks of resources that entrepreneurs contribute to their new firms at the time of
founding—may explain the different life chances of new firms during start-up (cf. Bhide´, 2000; Klepper, 2001); in that
way certain firms (e.g. spin-offs or firms of serial entrepreneurs) already control a relatively large productive base and
some financial reserves at start.
3
This argument is partly different from the ‘‘liability of newness’ that new firms face as identified by Stinchcombe
(1965; cf. Penrose, 1995: 205) who described the different risks of dying of an organization during its life course. First,
new firms lack the social ties to key stakeholders that give them access to resources. Second, entrepreneurs also
have to convince external stakeholders to invest in a venture with uncertain future prospects. Third, the processes of
mobilizing resources and learning of the new roles are resource- and time-intensive, which leads to economic
inefficiencies.
6 E. Garnsey et al.
In some cases, asynchronies of this kind can actually stimulate growth by spurring action to
remedy deficits or surpluses—either by building new resources internally or by obtaining
complementary resources externally. Obtaining or creating complementary resources are
solutions that enlarge the firm’s knowledge base, from which new opportunities can be
pursued (Penrose, 1995: 54). The learning process that new firms go through may result in
non-linear and discontinuous growth paths in which, for example, spurts of growth are
followed by periods of assimilation or stagnation.
Dynamic processes continually alter the resource mix. Underutilized resources are an
unacceptable opportunity cost for entrepreneurial managers intent on the pursuit of growth.
Those who find ways to exploit under-used resources to realize new opportunities are more
likely to sustain growth (cf. Wiklund and Shepherd, 2003). But, once growth prospects are
actively pursued, asynchronies arise again, possibly giving rise to the perverse effects of
growth. According to Penrose, growing firms tend to experience a critical resource deficit in
the capacity of decision makers to deal with the demands of growth. Managers with inside
knowledge, experience and authority cannot be recruited in the market (Penrose, 1995: 45).
Other kinds of resource deficit are common and have to be dealt with by acquiring external
or building internal resources.
5
This occurs sequentially as growth exerts uneven pressures
on resources and hence on requirements for matching resources to remedy deficits or
complement surpluses. If firms do not create or acquire the complementary resources
required, their growth will be inhibited and a period of ‘‘stagnation’’ may follow (Penrose,
1995: 47). This applies not only to those faced with capacity shortages, but also to those
who allow some of the resources they have to remain unused. They are failing to exploit a
key growth mechanism, the building of complementary resources.
The mismatch between available resources and required resources ‘‘limits the amount
of expansion that can be undertaken at any given time …’’ (Penrose, 1955: 532). If we apply
these insights to the case of the rapidly growing new firm, we can foresee perverse effects
of early growth. The growing firm must draw in new resources to support growth, but it faces
planning delays and coordination problems because it is impossible to synchronize
resources to requirements precisely in a dynamic system. The need for internal coordination
sets a brake on the rate at which market opportunities can be pursued (Penrose, 1995: 44–
54).
Early growth may have dangerous consequences in new firms still lacking reserves.
The rate at which new resources are effectively mobilized may be insufficient to keep up
with the pressures of growth on resources. Growth may consequently stall and bottlenecks
can move growth into reverse. Penrose was concerned with firms of the kind that had built
up sufficient reserves to carry them through short-term crises, and did not examine
situations of this kind. But if we apply her dynamic analysis to the new firm that has
achieved early growth but still has an immature resource base, we see that crises are a
likely outcome of uncontrolled early growth. This effect can tip previously growing firms out
of the growth league and into the faltering or declining categories.
6
The dynamic instability of new growing firms is represented in Proposition 2 and
specified in Propositions 2a and 2b:
5
Penrose (1960) examined this in the case study of Hercules Powder, the Dupont demerger whose unused resources
opened new opportunities, which however required further complementary resources to overcome resource deficits.
6
Putting them at risk of being taken over on unfavourable terms (as a solution to their ‘‘growth-problems’’).
New Firm Growth 7
Proposition 2. New firm growth is uneven.
Proposition 2a. There are turning points in new firms’ growth paths.
Proposition 2b. Early growth is liable to reversal.
Economies of Growth
The relatively few firms that overcome the difficulties inhibiting early growth are those that
experience growth-reinforcing processes. Expanding firms of this kind—sufficiently well
resourced to take over competitors and complementary firms—are likely to become major
employers. A firm’s expanding resource base allows it to respond to changes in opportunity
structure without succumbing to resource shortages, but as Penrose emphasized, it is
necessary to perceive and act on the need for such reorientation. Penrose was interested
primarily in endogenous growth.
7
But she also emphasized the need for the firm to be
continually adjusting its activities to the shift in opportunities consequent on changes in
technology and markets. This ability to respond to a new market is also key in current
debates on dynamic capabilities (Teece et al., 1997; Eisenhardt and Martin, 2000). Penrose
identified prospects for new firms to grow in interstices, with expanding opportunities in new
growth industries (cf. Hugo and Garnsey, 2002). There is great interest at the present time
in fast growth firms that become major employers. These are often contemporary versions
of Penrose’s successful entrepreneurial firm that can embark on a process of resource
accumulation (Ghoshal et al., 2000, 2002) further enhancing their market position: ‘‘past
success is a powerful aid to future progress’’ (Penrose, 1995: 205). This phenomenon of
autocorrelated growth was early recognized by Ijiri and Simon (1967) and is recently
formalized by Botazzi and Secchi (2003) who consider this to be a self-reinforcing or
‘‘positive feedback’’ effect (cf. Arthur, 1994; Antonelli, 1997) in a process whereby the
probability of a given firm being able to exploit new opportunities depends on the number of
opportunities already captured. They regard economies of scale, economies of scope,
network externalities and knowledge accumulation as possible underlying economic
mechanisms that explain this process (Botazzi and Secchi, 2003: 417), while Chandler
(1990) regards the interaction between economies of scale and economies of scope as the
basic engine of economies of growth. Economies of growth may be important in explaining
growth paths of (young) firms, hence:
Proposition 3. Growth is conducive to further growth.
Dynamic Processes and Growth Indicators
In this paper, our aim is to use the Penrosean model outlined above to connect mechanisms
of growth at the level of the individual firm to evidence on growth among populations of
7
She recognized the importance of merger as a source of growth, though she was more interested in the internal
creation of knowledge and resources enabling growth (1995: 167).
8 E. Garnsey et al.
firms. The dynamic processes Penrose analysed are not directly measurable by growth
indicators. Rich case data are required to identify and explore the way they operate (cf.
Hugo and Garnsey, 2005). However, growth metrics can be used to invalidate or support
our inferences from Penrose on the development of new firms. For example, if there are few
signs of unsteady growth, interrupted growth, or growth surges and reversals, our argument
that asynchronies are endemic in new firms and result in performance fluctuations would be
in question. We present evidence in support of these non-linearities of growth among new
firms.
The following section explores new ways of identifying and comparing diachronic
features of new firms’ growth that are obscured by the standard synchronic measures.
Cross-sectional attributes cannot capture the growth paths of new firms or represent the
surges, interruptions and reversals which are to be expected from the operation of dynamic
processes. This paper is an exercise in theory building, not theory testing. We are not
carrying out variance analysis to compare the growth rates and performance of new firms,
nor formally testing associations among episodes of experience. The study aimed to draw
quantifiable propositions from the Penrosean explanatory model and to see if these are
consistent with aggregate data on new firm growth. This required collecting data of a
specific kind and using new methods to represent evidence on the growth paths of new
firms.
5. Developing Methods to Explore New Firm Growth Paths
Non-linear phenomena are usually modelled as if they were linear in order to make them
more tractable. Aggregate behaviour is analysed as though produced by individual entities
which all exhibit average behaviour (cf. Anderson et al., 1999). But standard cross-sectional
measures and average growth rates fail to capture important features of the course of
growth in firms.
8
Recent reflections on the fields of new firms and entrepreneurship
research have concluded that there is an explicit need for longitudinal research on firm
growth (Davidsson and Wiklund, 2000; Chandler and Lyon, 2001). Little evidence is
available on the growth paths of firms over time. Standard cross-sectional attribute
measures and average growth rates are unable to convey the cumulative process of new
firm growth. It was therefore necessary to collect and analyse new data for this purpose and
to devise methods for representing this evidence.
9
Since standard descriptive statistical
methods were unsuitable for our purpose we used a form of exploratory data analysis (EDA)
which seeks to find patterns in data that are of empirical and conceptual interest (Tukey,
1977; Marsh, 1988). In the empirical part of this paper we explore these issues by
9
The tracking of growth paths is proposed not as an alternative but as a supplement to approaches which measure
variance. This exploratory inquiry could be a starting point for more analytic quantitative work, drawing for example on
methodologies of demographers (cf. Van Wissen and Dykstra, 1999) and sociologists (cf. Abbott, 1995) in studies of
personal career paths.
8
In their exhaustive overview of organizational growth studies, Weinzimmer et al. (1998) show that these studies are
dominated by formulae using manipulations of first-year (t
0
) and last-year (t
f
) size to measure growth, either as
absolute growth or as growth rate. They acknowledge that these studies ‘‘ignore valuable information concerning the
middle years of a study, and thus fail to capture the dynamic properties of growth. This may result in either weak
models and/or misspecified results and interpretations’’ (Weinzimmer et al., 1998: 238). However, they leave the issue
of growth processes aside in the rest of their article.
New Firm Growth 9
investigating the growth paths of several longitudinal samples of new firms. The Penrosean
model provided guidance on causal factors and pointed to the kinds of patterns in growth
paths to look for.
10
From the explanatory model of firm growth outlined above we draw
measurable inferences about the extent, direction and discontinuities in firms’ growth over
time. Our data analysis was exploratory in that we had no prior conceptions as to how to
recognize or represent evidence relevant to our dynamic model of new firm growth. We had
to find new graphical methods to represent sequences of growth behaviour.
We applied sequence analysis
11
in a novel way to uncover growth episodes and turning
points during the early life course of new firms. For this purpose, the data points making up
the growth paths are compressed and coded for a reduction in a growth indicator, for an
increase, and for no change or negligible change. The resulting measures, examined below,
were thus coded to represent key turning points in the firms’ growth paths. Sequences such
as ‘‘plateau following growth’’, ‘‘growth following plateau’’ and ‘‘reversal following growth’’
can be identified in the samples. The interval between turning points (inflections) is
measured over time; the period between inflections is a growth episode. Growth inflections
are not unique but recurrent, that is, a firm may face some turning points more than once in
the course of its existence.
Measuring New Firm Growth
To represent and compare new firms’ growth experience, it is necessary to conceptualize
the growth of a new firm in ways that can be measured. According to Penrose (1995:
25):
Ideally, the size of firm for our purposes should be measured with respect to the present value of
the total of its resources (including its personnel) used for its own productive purposes. This is
almost impossible to discover in practice, and in the absence of any really satisfactory measure
of size we have a wide choice depending on our purpose.
Penrose was sceptical of measuring firm attributes that are unique to individual firms; these
may not be ‘‘reducible to any common denominator and are therefore incapable of
quantitative treatment’’ (Penrose, 1995: 199). But she recognized the need to measure
growth performance on some basis, for example, in terms of the growth of fixed assets
(Penrose, 1995: 25). Some such measures are needed for the purpose of comparing the
growth experience of firms.
Each of the following measures illustrates some feature of growth and each is subject
to limitations as a growth indicator (cf. Delmar et al., 2003). Input, output and value growth in
10
In contrast to the traditional research design, EDA need not start with a fully specified research problem since it
involves an open-minded inductive approach, exploring what is to be found in the data, whether or not anticipated.
This exploratory research generates questions that can be answered by analysing contrasting cases with regard to
interesting features of the data, for example, why certain firms initially follow the same growth path but bifurcate after a
certain moment in time. Unlike some investigators using EDA, we had interpretive guidance from our model.
11
Sequence analysis involves the temporal ordering of events, which mark the transitions of one phase state into
another. The roots of sequence analysis can be traced back to the study of gene sequencing in biology, and has been
applied to the study of the careers of persons (Abbott, 1995).
10 E. Garnsey et al.
a firm may not be aligned, and so diverse growth measures should not be expected to
correlate (see Wiklund and Shepherd, 2005). A firm’s growth can be measured in terms of
inputs (investment funds, employees), in terms of the value of the firm (assets, market
capitalization, economic value added) or outputs (sales revenues, profits).
N Many studies of new venture growth cite funds invested at various stages, but these
track the ‘‘burn rate’’ of investment funds rather than the growth of productive resources.
N Sales figures (turnover) have to be adjusted for inflation, and are affected by vertical
integration (how much of final sales is produced internally or bought in).
N Profits are in various ways to avoid tax liability or to raise the valuation of the firm,
creating comparison problems.
N Employment figures are the most commonly used measure because they offer
standardized, comparable data on the rate and direction in which a firm has been expanding.
N Valuation of the firm’s assets is a composite indicator of growth. This includes tangible
assets, for example, productive equipment and buildings, and a valuation of intangible
assets such as the firm’s expertise and reputation. The valuation of the firm varies with
investor sentiment over the business cycle. A battery of financial ratios is supplied for
investors once firms become public.
N Other composite indicators of growth can be devised, and measures may be weighted.
Some indicators like Birch’s take into account initial firm size when representing relative
growth rates. The Birch Employment Growth Index (Birch, 1987) corrects for firm size by
using the product of absolute growth and percentage growth.
Tracking growth measures over time (instead of taking average measures of growth rates and
cross-sectional indicators of attributes) is a way of approaching growth in a diachronic way. It is
clear that growth indicators reflect the outcomes of many different interacting causes that
influence new firm growth paths. Before the relationships between cause and effect can be
meaningfully explored, there is groundwork to be done on ways of representing firm growth
without losing diachronic information that conveys the path of growth over time.
A firm’s growth can be thought of as following one among multiple possible paths
(Garnsey, 1998). The actual path can be traced by a variety of growth measures at varying
intervals. Slope and change in slope are the elemental components of a firm’s growth path.
It is axiomatic that at any point in time, metrics of firm size change will show the firm
undergoing growth, stability or decline. Fluctuations may occur at any time and on any
scale. As in other fractal phenomena, fluctuations give the appearance of being smoothed
out when measures are taken at wider intervals. The series of intervals at which measures
are taken along the x-axis determines how many of such fluctuations are captured in the
data. The representation of growth paths also depends on measures used. We have
chosen the standard indicator, namely, employment, which is the most comparable.
12
Changes in employee size are a conservative measure for investigating the instability of
growth, in comparison to more rapidly changing figures such as sales or capital valuation. In
our analysis, employment growth has been used for the construction of growth episodes
and the operational definition of turning points. We converted firms’ growth over time from
12
The German sample has parallel data for sales and employment, enabling us to identify discrepancies between the
two sets of measures.
New Firm Growth 11
interval to nominal scales. These represented types of growth episodes experienced,
according to rate of growth over that episode. A sequence of summarized growth episodes
was used to depict turning points in growth paths.
Research Samples
Longitudinal samples of new firms which were diverse in some respects but shared enough
common features to allow meaningful comparison were needed as a research base for the
empirical investigation of early paths of growth over at least 5 years. We aimed to examine
firms founded in the same place and year so that the firms in the sample would experience
similar macro economic effects as they aged. We wanted to investigate the growth of a
cohort of new firms drawn from a coherent population of firms. The group of firms
investigated should not be in zero-sum competition for customers, that is, should have their
own competitive niche. Technology-based firms founded in the Cambridge area met these
criteria. Data on growth performance over a 10-year period were compiled for 237 firms
founded in 1990. The inquiry was replicated and refined using a quota sample of 136
German technology-based firms surviving over 7 years from 1991/92 and a sample of 25
young fast-growing Netherlands firms surviving over at least 5 years from 1990 to 1995. The
characteristics of the three research samples are summarized in Table 1.
The data were compressed in two ways. First, interval scale data were reduced to
nominal scale by converting employment level to direction of change from previous period.
Data-points in the samples were coded for growth reduction greater than 5 per cent, for
increase greater than 5 per cent and for change in either direction of less than 5 per cent. In
a subsequent compression, the resulting measures were coded according to key turning
points in evidence. Growth paths are categorized by dominant turning point(s), presented as
archetypes in Figure 3. In what follows propositions from the model of dynamic processes
are examined in the light of evidence on growth paths.
6. New Firm Development Explored: Growth Paths
In this section we will apply the propositions that are drawn from the Penrosean model to the
three research samples.
Table 1. Characteristics of the research samples
Sampling Data
Cambridgeshire (UK) Population of 237 technology-based
firms founded in 1990 (93
survived over 10 years)
Biennial data on
employment
Germany Sample of 136 technology-based
firms founded in 1991–92 and
surviving over 8 years
Annual employment and
sales data (and 15
qualitative case studies)
Netherlands Sample of 25 young fast-growing
firms founded in 1990–95 and
surviving at least 5 years
Annual employment data
(and all 25 qualitative
case studies)
12 E. Garnsey et al.
Proposition 1. New firms that do not grow are more likely to close.
New firms that experience little growth are less likely to build up reserves to tide them over
the resource asynchronies experienced by most new firms. Because firms need a
continuous inflow of resources in order to trade and survive, those that are not growing and
expanding productive activity are particularly vulnerable to change. If their environment
shifts, the revenues on which they depend for inputs are threatened. Figure 1 shows that
firms that had grown less than the mean growth of firms in their sector were more likely to be
closed.
13
This is consistent with Kirchhoff’s findings for high-tech firms, that firms with a
better growth record were more likely to survive (Kirchhoff, 1994: 184; see also Phillips and
Kirchhoff, 1989; Cosh and Hughes, 2000).
Growth creates problems. Reynolds and White (1997: 122 and 215) found that in their
large US new firm samples, ‘‘firms with more (growth) potential reported more problems of
every kind’’. But the problems accompanying growth are less dangerous to a firm’s survival
than the absence of growth.
14
Our approach is particularly useful for inquiry into growth paths, as discussed under
Propositions 2, 2a, 2b and 3 below.
Proposition 2. New firm growth is uneven.
Delay, interruptions and surges of growth are likely in new firms as resource problems arise,
are resolved and opportunities shift for resource constrained new firms. Dynamic processes
of this kind are likely to result in variations in the timing, magnitude, duration and rate of
change of growth as between firms and in the same firm over time. For example, difficulties
Figure 1. Growth and no-growth by age of firm, Cambridgeshire cohort
13
It is possible that in some firms the decision to lay off employees would have been planned and desired, for
example, through the sale of a division. But firms would not have intended cutbacks that increased their vulnerability to
closure.
14
Across all sectors, the well-endowed start-up and initial large team is less likely to lose impetus (Reynolds and
White, 1997). In technology-based ventures, large team start-ups are often the result of demergers or groups of
people leaving earlier employment together in spin-outs. Where they have experience and access to a resource base
this enables the ‘‘new’’ firm to achieve revenues early on.
New Firm Growth 13
regarding the recognition of the ‘‘productive opportunity’’ and of building a productive base
will result in differences in the onset of growth, with some new firms showing a slow start
and growth picking up as the productive base becomes operational.
The growth paths of the firms demonstrated an uneven record. In Figure 2, rate of
growth is shown by slope, extent of growth by the scale used. Figure 2 illustrates growth
discontinuities for several of the firms that survived over a 10-year period. They include
variations in the timing of the onset of growth, interruptions in the form of growth plateaux
and growth reversal. Sustained growth among the firms was rare. This relates to the
findings in studies on growth rates of firms that found a systematic tendency for the variance
in growth rates to be larger for small (and often young) firms than for large firms (Hymer and
Pashigan, 1962; Amaral et al., 1997; Wilson and Morris, 2000).
Proposition 2a. There are turning points in new firms’ growth paths.
Figure 2. Growth paths of new firms, Netherlands sample
14 E. Garnsey et al.
This is a specification of Proposition 2. Dynamic processes provoke interruptions and
setbacks. These discontinuities imply turning points marking changes in growth trajectories
in terms of rate and duration. Summary measures, graphics and equations did not readily
capture relevant information from growth path data of the kind illustrated in Figure 2.
Standard measures of growth rates lost the information we sought. For example, if we look
at Figure 2, cross-sectional measures could assign firms A and C to the same growth
category if the age of 9 years is taken as the second time point, while a diachronic
comparison of the growth paths with EDA would lead to assigning firms A and B to the same
category. The same argument could be made in the lower graphic: if the age of 3 years is
taken as a second time point, all three firms would be assigned to the same growth category,
while we would classify firm E in another category, due to the setback it had faced in this
period. If we take the age of 10 as an end point, cross-sectional approaches would assign
firms E and F to the same growth category, while EDA shows that firm F was a slow but
steady grower, and that firm E faced several setbacks over the whole period.
Proposition 2b. Early growth is liable to reversal.
The tendency for early growth that is interrupted to spiral into decline or reversal is a
dynamic process discussed in the explanatory model. Figure 3 shows that in the Cambridge
data-set, only 6 per cent of the surviving firms grew continuously over the 10 years, with
Figure 3. Turning points among Cambridgeshire firms founded in 1990, surviving 10 years
New Firm Growth 15
another 14 per cent growing continuously after a delay or preparatory period. Another 24
per cent stagnated after an initial growth period, while 37 per cent faced growth setbacks
during their early life course. Figure 3 summarizes turning points for the 93 firms founded in
1990, which survived 10 years and remained in Cambridge. These firms are those with the
best survival record in a cohort of technology-based firms.
The revenue growth record of a cohort of survivors in the German sample shows that
only 4 per cent of the firms experienced continuous growth while 59 per cent experienced at
least one episode of decline and 88 per cent experienced at least one episode of stagnation.
Employment growth data produce a similar picture, with only 1 per cent of all firms having
grown continuously, while 49 per cent experienced at least one period of decline. The firms
making up the Netherlands sample revealed, as could be expected from a sample selected
for growth record, a higher proportion than the other samples of continuous growth paths
(36 per cent of the firms) and a much lower incidence of setbacks (only 16 per cent of the
firms in the sample faced a setback during their early life course). This sample included only
those that had at least 20 employees within the first 10 years. Even in this sample, 24 per
cent of the firms experienced delayed growth and 24 per cent had an initial growth period
followed by a plateau period.
There is evidence from other sources that rapid growth of new firms is hard to
sustain.
15
In one study of fast growth firms, among the fastest 10 per cent of growth
companies, one-fifth show a decline in performance within 4 years (Storey, 1997b: 6). A
more recent study analysing these ‘‘Ten Percenters’’ over a decade shows that the gazelle-
like growth behaviour of these firms is very fragile, as the average growth of these
firms slowed dramatically after their initial fast growth period (Parker et al., 2005). An
earlier study had cited ‘‘empirical evidence which suggests that the financial structures
and performances of high performers and failing firms are very similar’’ (Keasey and
Watson, 1993: 112). The pressures of growth take a toll even of the most promising new
ventures.
16
Proposition 3. Growth is conducive to further growth.
The advantages of early growth are internal (learning effects) as well as external (market
position). The data from all three samples showed growth more likely to follow growth than
to follow an episode of plateau or decline. This is consistent with other work showing that
growth is more likely among growth firms (e.g. Wagner, 1992; Blanchflower and Burgess,
1996; Stanley et al., 1996; Cosh and Hughes, 2000). The dynamic process approach
16
An analysis based on a large US data-set indicates that the chances of achieving high growth are greater among
highly innovative (mainly high-tech) firms. But among these highly innovative firms, those that fail to grow sufficiently
are more likely to close than those that achieve growth (Kirchhoff, 1994). This implies that an innovative firm is more
likely to find a promising resource base and market position, but that those firms in this group that fail to sustain growth
are likely to run into difficulties leading to closure. We suggest that failure to sustain growth may not simply be the
result of resource constraints (Kirchhoff, 1994), but of growth at a rate too rapid to be sustained in relation to the
resources available to the firm. Confirmation requires more detailed data like case study evidence that shows how this
can occur.
15
This resembles the ‘‘regression to the mean’’ phenomenon that is well known in the industrial organization literature
(Caves, 1998).
16 E. Garnsey et al.
explains why conditions for growth reinforcement are not created during stasis or decline
phases; growth is more propitious for further growth unless resource constraints set in.
In both the German and Cambridge samples the ‘‘growth–growth’’ formation, that is, a
year of growth followed by another year of growth, was the most common sequence,
representing 30 and 28 per cent of all two-period sequences in the samples. Expressed
differently, around 60 per cent of sequences beginning with an incidence of growth were
followed by a second period of growth, whereas only 36–39 per cent of sequences
beginning with a plateau were followed by growth. In the German case 58 per cent of growth
sequences were followed by another period of growth, compared with 59 per cent in the
Cambridge cohort. The plateau–growth sequence was found in 36 per cent of the
sequences in the German sample and 39 per cent in the sequences of the Cambridge
cohort. In the Netherlands sample of successful firms the ‘‘growth–growth’’ formation was
even more pronounced: 85 per cent of all two-period sequences. Even more of the
sequences beginning with an incidence of growth were followed by a second period of
growth (93 per cent), while only 52 per cent of sequences beginning with a plateau were
followed by growth.
7. Concluding Remarks
A multi-level diachronic approach to new firm growth reveals dynamic processes at work as
the new firms develop. This provides a theoretically grounded basis for interpreting case
study evidence at the firm level. Detailed case studies of new firms can be carried out to
explore the operation of dynamic processes of the kind set out above. We have shown that
many of the dynamic processes that Penrose identified in mature growing firms can be seen
to occur in new firms and to shape their development experience.
17
One of the problems of
case analysis is the difficulty of making systematic comparisons. The methods we propose
provide a way of comparing the growth paths of new firms and identifying key differences
calling for explanation from case evidence.
Moreover, instead of the disjuncture often found in the literature between research on
development processes in the individual firm and generalizations about growth rates in
populations of new firms, analysis at the two levels can be mutually supportive. The
conceptual scheme proposed makes sense of the non-linearities we have discovered in the
growth paths of new firms illustrated by three longitudinal samples of new firms. Standard
cross-sectional attribute/performance correlations and average growth rates fail to capture
important features of the course of growth in firms. The exploratory analysis has shown that
there are recurring patterns in the growth of new firms associated with typical
developmental experience.
Further Work
Implications of the model and empirical findings reported here indicate the need to
reconsider issues that were disregarded during the recent period when ‘‘success attributes’’
17
The proposed approach is most fruitful for the analysis of relatively young firms in industries where there is enough
‘‘space’’ to grow without having to compete severely with incumbents; that is, the processes of opportunity
identification and resource mobilization are more relevant than the process of value capture.
New Firm Growth 17
were widely regarded as granting certain new firms the potential for sustained rapid growth.
The model of new firm development presented here explains why it is to be expected that
ventures that achieve early rapid growth often run into resource shortage and other growth-
induced problems, while other firms that overcome their difficulties move onto an improved
growth trajectory. Aggregate effects are likely to be regression to the mean:
… a firm that grew more than (or less than) the industry growth rate in the previous period … on
the average tends to grow more than (or less than) the industry growth rate in the current period
but at a closer rate to the industry growth rate than in the previous period (Ijiri and Simon,
1967: 350)
However, it does not follow that growth is the result of chance factors (Geroski, 2000) or the
inexplicable outcome of ‘‘random shocks leading to some fast-growth firms, but without any
consistent factors ‘explaining’ their growth’’ (Storey, 1997a: 119). New firm growth is not
indeterminate but, like other complex dynamic processes, the outcome of systemic
feedback mechanisms, the effects of which may be mistaken for randomness when
statistical methods are used that cannot capture the subtleties of causal feedback (cf. Hugo
and Garnsey, 2005). Further detailed studies are needed to explore the way entrepreneurs
and managers respond to endogenous and exogenous developments; these determine
which firms recover and which ones experience reversal among firms that, taken together,
experience regression to mean growth rates over time.
Acknowledgement
Some of the funding for this work was provided by the Institute for Manufacturing Research
Centre, University of Cambridge (EPSRC) and the Urban and Regional research centre
Utrecht (URU), Utrecht University.
References
Abbott, A. (1995) Sequence analysis: new methods for old ideas, Annual Review of Sociology, 21, pp. 93–113.
Aldrich, H. E. (1999) Organizations Evolving (London: Sage).
Almus, M. and Nerlinger, E. A. (1999) Growth of new technology-based firms: which factors matter?, Small Business Economics, 13, pp.
141–154.
Alvarez, S. A. and Busenitz, L. W. (2001) The entrepreneurship of resource-based theory, Journal of Management, 27, pp. 755–775.
Amaral, L. A. N. et al. (1997) Scaling behavior in economics: the problem of quantifying company growth, Physica A, 244(1–4), pp. 1–24.
Anderson, P. et al. (1999) Introduction to the Special Issue: Applications of complexity theory to organization science, Organization
Science, 10(3), pp. 233–236.
Antonelli, C. (1997) The economics of path-dependence in industrial organization, International Journal of Industrial Organization, 15, pp.
643–675.
Argenti, J. (1976) Corporate Collapse—The Causes and Symptoms (London: McGraw-Hill).
Arthur, B. W. (1994) Increasing Returns and Path Dependence in the Economy (Ann Arbor: University of Michigan Press).
Audretsch, D. B. and Thurik, A. R. (2001) What’s new about the new economy? Sources of growth in the managed and entrepreneurial
economies, Industrial and Corporate Change, 10(1), pp. 267–325.
Barkham, R. et al. (1996) The Determinants of Small Firm Growth: An Inter-Regional Study in the UK 1986–1990 (London: Jessica
Kingsley).
Best, M. H. and Garnsey, E. (1999) Edith Penrose, 1914–1996, Economic Journal, 109(453), pp. 187–201.
18 E. Garnsey et al.
Bhide´ , A. (2000) The Origin and Evolution of New Businesses (Oxford: Oxford University Press).
Birch, D. (1987) Job Creation in America (New York: The Free Press).
Blanchflower, D. G. and Burgess, S. M. (1996) Job creation and job destruction in Great Britain in the 1980s, Industrial and Labor
Relations Review, 50(1), pp. 17–38.
Botazzi, G. and Secchi, A. (2003) Why are distributions of firm growth rates tent-shaped?, Economics Letters, 80, pp. 415–420.
Brush, C. G. et al. (2001) From initial idea to unique advantage: the entrepreneurial challenge of constructing a resource base, Academy
of Management Executive, 15(1), pp. 64–78.
Caves, R. E. (1998) Industrial organization and new findings on the turnover and mobility of firms, Journal of Economic Literature, 36, pp.
1947–1982.
Chandler, A. D. (1990) Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Harvard University Press).
Chandler, G. N. and Lyon, D. W. (2001) Methodological issues in entrepreneurship research: the past decade, Entrepreneurship Theory
and Practice, 25(4), pp. 101–113.
Churchill, N. (1997) The six key phases of company growth, in: S. Birley & D. Muzyka (Eds) Mastering Enterprise, pp. 213–219 (London:
Financial Times, Pitman).
Churchill, N. and Lewis, V. (1983) The five stages of small business growth, Harvard Business Review, May–June, pp. 30–50.
Cosh, A. and Hughes, A. (2000) British Enterprise in Transition (Cambridge: ESRC Centre for Business Research).
Curran, J. and Blackburn, R. (2001) Researching the Small Enterprise (London: Sage).
Cyert, R. M. and March, J. G. (1963) A Behavioral Theory of the Firm (Englewood Cliffs, NJ: Prentice-Hall).
Davidsson, P. (1989) Entrepreneurship—and after? A study of growth willingness in small firms, Journal of Business Venturing, 4, pp.
211–226.
Davidsson, P. and Wiklund, J. (2000) Conceptual and empirical challenges in the study of firm growth, in: D. L. Sexton & H. Landstro¨m
(Eds) The Blackwell Handbook of Entrepreneurship, pp. 26–44 (Oxford: Blackwell).
Delmar, F. et al. (2003) Arriving at the high-growth firm, Journal of Business Venturing, 18, pp. 189–216.
Eisenhardt, K. M. and Martin, J. A. (2000) Dynamic capabilities: what are they?, Strategic Management Journal, 21(10/11), pp.
1105–1121.
Foss, N. J. (1997) Resources and strategy: problems, open issues, and ways ahead, in: N. J. Foss (Ed.) Resources, Firms, and
Strategies. A Reader in the Resource-Based Perspective, pp. 345–365 (Oxford: Oxford University Press).
Freel, M. S. and Robson, P. J. A. (2004) Small firm innovation, growth and performance. Evidence from Scotland and Northern England,
International Small Business Journal, 22(6), pp. 561–575.
Garnsey, E. (1998) A theory of the early growth of the firm, Industrial and Corporate Change, 3, pp. 523–556.
Geroski, P. (2000) The growth of firms in theory and practice, in: N. Foss & V. Mahnke (Eds) Competence, Governance and
Entrepreneurship, Advances in Economic Strategy Research, pp. 168–186 (Oxford: Oxford University Press).
Ghoshal, S. et al. (2000) Organizing for firm growth: the interaction between resource-accumulating and organizing processes, in: N. Foss
& V. Mahnke (Eds) Competence, Governance and Entrepreneurship, Advances in Economic Strategy Research, pp. 146–167
(Oxford: Oxford University Press).
Ghoshal, S. et al. (2002) Management competence, firm growth, and economic progress, in: C. Pitelis (Ed.) The Growth of the Firm; The
Legacy of Edith Penrose, pp. 279–308 (Oxford: Oxford University Press).
Greiner, L. E. (1972) Evolution and revolution as organizations grow, Harvard Business Review, July–August, pp. 37–46.
Hugo, O. and Garnsey, E. (2002) Hotmail & Co.: the emergence of electronic messaging and the growth of four entrepreneurial entrants,
in: R. Oakey (Ed.) New Technology-Based Firms in the New Millennium (Amsterdam: Pergamon Press).
Hugo, O. and Garnsey, E. (2005) Problem-solving and competence creation in new firms, Managerial and Decision Economics, 26, pp.
139–148.
Hymer, S. and Pashigan, O. (1962) Firm size and rate of growth, Journal of Political Economy, 70, pp. 556–569.
Ijiri, Y. and Simon, H. (1967) A model of business firm growth, Econometrica, 35(2), pp. 348–355.
Kazanjian, R. K. and Drazin, R. (1989) An empirical test of a stage of growth progression model, Management Science, 35(12), pp.
1489–1503.
Keasey, K. and Watson, R. (1993) Small Firm Management: Ownership, Finance and Performance (Oxford: Blackwell).
Kerlinger, F. N. (1986) Foundations of Behavioral Research, 3rd edn (New York: Holt, Rinehart & Winston).
Kirchhoff, B. (1994) Entrepreneurship and Dynamic Capitalism: The Economics of Business Firm Formation and Growth (Westport, CT:
Praeger).
New Firm Growth 19
Klepper, S. (2001) Employee start-ups in high tech industries, Industrial and Corporate Change, 10(3), pp. 639–674.
Kor, Y. Y. and Mahoney, J. T. (2000) Penrose’s resource-based approach: the process and product of research activity, Journal of
Management Studies, 37(1), pp. 109–139.
Lichtenstein, B. M. B. and Brush, C. G. (2001) How do ‘‘resource bundles’’ develop and change in new ventures? A dynamic model and
longitudinal exploration, Entrepreneurship Theory and Practice, 25(1), pp. 37–58.
Marsh, C. (1988) Exploring Data (Cambridge: Polity Press).
McKelvey, B. (2004) Toward a complexity science of entrepreneurship, Journal of Business Venturing, 19, pp. 313–341.
Mohr, L. B. (1982) Explaining Organizational Behavior (London: Jossey-Bass).
Oakey, R. (1995) High Technology New Firms: Variable Barriers to Growth (London: Paul Chapman).
Parker, S. C. et al. (2005) What happens to gazelles? The importance of dynamic management strategy. Paper presented at ERIM
workshop ‘‘Perspectives on the Longitudinal Analysis of New Firm Growth’’, Erasmus University Rotterdam, the Netherlands, 18–19
May 2005.
Penrose, E. (1955) Research on the business firm: limits to growth and size of firms, American Economic Review, 45(2), pp. 531–543.
Penrose, E. (1960) The growth of the firm—a case study: the Hercules Powder Company, Business History Review, 34(1), pp. 1–23.
Penrose, E. (1995) The Theory of the Growth of the Firm, 3rd edn (Oxford: Oxford University Press).
Phillips, B. D. and Kirchhoff, B. A. (1989) Formation, growth, and survival: small firm dynamics in the US economy, Small Business
Economics, 1(1), pp. 65–74.
Pitelis, C. (2002) The Growth of the Firm; The Legacy of Edith Penrose (Oxford: Oxford University Press).
Porter, M. (1991) Towards a dynamic theory of strategy, Strategic Management Journal, 12, pp. 95–117.
Reynolds, P. and White, S. (1997) The Entrepreneurial Process (Westport, CT: Quorum Books).
Shane, S. (2000) Prior knowledge and the discovery of entrepreneurial opportunities, Organization Science, 11, pp. 448–469.
Stanley, M. H. R. et al. (1996) Scaling behaviour in the growth of companies, Nature, 379(6568), pp. 804–806.
Stinchcombe, A. L. (1965) Social structure and organizations, in: J. G. March (Ed.) Handbook of Organizations, pp. 142–193 (Chicago:
Rand McNally).
Storey, D. (1997a) Understanding the Small Business Sector (London: Thomson).
Storey, D. (1997b) The Ten Percenters, Fast Growing SMEs in Great Britain, Second Report (London: Deloitte Touche Tohmatzu
International).
Teece, D. J. et al. (1997) Dynamic capabilities and strategic management, Strategic Management Journal, 18, pp. 509–533.
Tukey, J. W. (1977) Exploratory Data Analysis (Reading, MA: Addison-Wesley).
Utterback, J. M. et al. (1988) Technology and industrial innovation in Sweden: a study of technology-based firms formed between 1965
and 1980, Research Policy, 17, pp. 15–26.
Van de Ven, A. H. and Poole, M. S. (1995) Explaining development and change in organizations, Academy of Management Review, 20,
pp. 510–540.
Van Wissen, L. J. G. and Dykstra, P. A. (1999) Population Issues. An Interdisciplinary Focus (New York: Kluwer Academic/Plenum).
Wagner, J. (1992) Firm size, firm growth, and persistence of chance—testing Gibrat’s Law with establishment data from Lower Saxony,
1978–1989, Small Business Economics, 4(2), pp. 125–131.
Weinzimmer, L. G. et al. (1998) Measuring organizational growth: issues, consequences and guidelines, Journal of Management, 24(2),
pp. 235–262.
Wiklund, J. (1998) Small firm growth and performance: entrepreneurship and beyond. PhD Thesis, Jo¨nko¨ ping International Business
School.
Wiklund, J. and Shepherd, D. (2003) Knowledge-based resources, entrepreneurial orientation, and the performance of small and medium-
sized businesses, Strategic Management Journal, 24, pp. 1307–1314.
Wiklund, J. and Shepherd, D. (2005) Knowledge accumulation in growth studies: the consequences of methodological choices. Paper
presented at ERIM workshop ‘‘Perspectives on the Longitudinal Analysis of New Firm Growth’’, Erasmus University Rotterdam, the
Netherlands, 18–19 May.
Wilson, J. O. S. and Morris, J. E. (2000) The size and growth of UK manufacturing and service firms, Service Industries Journal, 20(2), pp.
25–38.
Woo, C. Y. et al. (1994) Theory building in the presence of ‘‘randomness’’: the case of venture creation and performance, Journal of
Management Studies, 31(4), pp. 507–524.
20 E. Garnsey et al.
... HGFs have difficulty sustaining their frenetic pace of growth. Being a HGF is therefore a temporary phenomenon (Garnsey et al, 2006). ...
... This is a valuable comment in the context of 'fast growth' lists which are typically based on only three or four years of evidence. Garnsey et al (2006) also argue that new firm growth is not an indeterminate process but rather the outcome of 'systemic feedback mechanisms', the effects of which may be mistaken for randomness when statistical methods are used to examine this complex phenomenon. They argue that further detailed studies are needed to explore the way entrepreneurs respond to developments that determine which firms recover from periods of decline and which ones fail. ...
... Quantitative studies of the type reviewed above have been important in indicating the significance of high growth firms, the nature of growth and where high growth firms occur in the economy. However, standard cross-sectional attribute/performance correlations fail to capture important features of the complex dynamics of growth in firms (see Garnsey et al, 2006). For example, they ignore fluctuations in growth. ...
... The literature on firm growth indicates various measurement of growth but of little agreement between them (Schimke & Brenner, 2011), with the most common units of measurement include inputs in terms of sales (Delmar et al., 2003;Garnsey, Stam & Heffernan, 2006;Ferlic, 2008;Fadahunsi, 2012;Runtuk et al., 2014), employment (Federico et al., 2012), profitability (Manzano et al., 2012), gross output (Coad & Tamvada, 2012), assets (Weinzimmer et al., 1998), both in terms of relative and absolute (Schimke & Brenner, 2011). While sales are used in their absolute forms in many researches, some use the percentage change in sales as the measurement (Yazdanfar & Ohman, 2015). ...
Conference Paper
Full-text available
The contribution and significance of SMEs and their growth as important drivers of economic dynamics of nations through job creation and added-value warrant continuous in-depth studies from various perspectives including economics, psychology, entrepreneurship, strategy and other disciplines. The awareness of the importance related to the sustainable growth of SMEs has resulted in the presence of various definitions and models of growth in the body of knowledge. Such varied objectives registered diversity of approaches and perspectives on firm growth research. This paper seeks to explore the existing literature on firm growth to further enhance the knowledge and understanding in this area, particularly in context of sustainability. Current models on firm growth were assessed, critically synthesizing their inherent limitations and incoherent findings that led to our conclusion; that a need for more long-term growth model or sustainable growth of the SMEs in order to maximize their potentials exists.
... The literature on firm growth indicates various measurement of growth but of little agreement between them ( Schimke & Brenner, 2011), with the most common units of measurement include inputs in terms of sales (Delmar et al., 2003;Garnsey, Stam & Heffernan, 2006;Ferlic, 2008;Fadahunsi, 2012;Runtuk et al., 2014), employment (Federico et al., 2012), profitability ( Manzano et al., 2012), gross output (Coad & Tamvada, 2012), assets (Weinzimmer et al., 1998), both in terms of relative and absolute (Schimke & Brenner, 2011). While sales are used in their absolute forms in many researches, some use the percentage change in sales as the measurement (Yazdanfar & Ohman, 2015). ...
Preprint
The contribution and importance of SMEs growth as important drivers of economic dynamics of the nations through job creations and added value warrant continuous and in-depth studies from various fields of economics, psychology, entrepreneurship, strategy and other various disciplines. The awareness of the importance of growth of SMEs has resulted in the presence of various definitions of growth. These different objectives register diversity of approaches and perspectives on firm growth research. This paper seeks to explore the literature on firm growth to further enhance the knowledge in this area. Current models on firm growth will be assessed including its inherent limitations and incoherent findings that lead to the need for more long term growth model or sustainable growth of the SMEs to maximize their potentials.
... The literature on firm growth indicates various measurement of growth but of little agreement between them (Schimke & Brenner, 2011), with the most common units of measurement include inputs in terms of sales (Delmar et al., 2003;Garnsey, Stam & Heffernan, 2006;Ferlic, 2008;Fadahunsi, 2012;Runtuk et al., 2014), employment (Federico et al., 2012), profitability (Manzano et al., 2012), gross output (Coad & Tamvada, 2012), assets (Weinzimmer et al., 1998), both in terms of relative and absolute (Schimke & Brenner, 2011). While sales are used in their absolute forms in many researches, some use the percentage change in sales as the measurement (Yazdanfar & Ohman, 2015). ...
... Entrepreneurial outcomes have been measured by revenue, employees, growth, profit, performance, success, economic well-being, survival, market-share, amount of venture capital funding, IPO underpricing, return on investment, and return on equity, among others (Davidsson, 2004; Delmar, Davidsson, & Gartner, 2003; Garnsey, Stam, & Heffernan, 2006; Leitch, Hill, & Neergaard, 2010; Shepherd & Wiklund, 2009; Steffens, Davidsson, & Fitzsimmons, 2009; Van de Ven & Engleman, 2004). Some of these are more relevant and measurable than others. ...
Conference Paper
Full-text available
Reviews of the management, entrepreneurship, and marketing literature suggest that most performance-based outcomes are not distributed according to Gaussian assumptions within the normal, bell-shaped curve. Instead, Paretian (i.e., power-law) distributions are the new norm, where extreme outliers occur far more frequently and, more importantly, have a disproportionate influence on the larger system than normal statistics would lead us to believe. The unique statistical properties of power-law distributions require a scale-free theory, where a single explanation at one level applies to multiple units at the preceding level. As such, I develop a hypothesis to suggest that a founder's expectations for future growth in the nascent organizing stage can influence a venture's potential ability to scale up into an extreme outcome at later stages. I use MATLAB to construct semi-parametric bootstrap estimates for maximum likelihood fit with a power-law model on representative sample datasets from three levels of self-organized venture emergence: nascent, active start-up, and hyper-growth. I find substantial support for the scale-free hypothesis – a universal scaling exponent of ~ 1.75 – at multiple units and levels of analysis. I use the results to suggest various implications for theory, practice, pedagogy, and policy. ACKNOWLEDGEMENT
Thesis
Full-text available
En esta tesis se estudia el proceso de crecimiento de las gacelas tecnológicas en Argentina entre 2002 y 2010. Se desarrolla una aproximación conceptual ecléctica tomando aportes provenientes de la economía y del management e integrando trabajos empíricos sobre empresas de base tecnológica. Se exponen y analizan cuatro casos de estudio de gacelas tecnológicas de los sectores de Tecnologías de la Información y Comunicación (TICs). Conceptualmente, se identifican diferentes etapas de crecimiento transitadas por estas empresas, heterogéneas en lo que refiere a su extensión y a las características en tanto su organización interna. La velocidad de los cambios tecnológicos y competitivos de los entornos de negocios tecnológicos presiona a estas firmas a transitar procesos acelerados de exploración y alineación entre sus estrategias, estructuras y competencias centrales. Se identifican así diferentes limitantes a estos procesos de crecimiento, tanto internos como externos. Finalmente, más empíricamente, se analiza la importancia que presentan las características de los equipos emprendedores, sus estrategias y el desarrollo experimentado por las firmas al encarar sus procesos de crecimiento.
Article
This paper studies the influence of sunk costs on industry evolution using the stylized pure selection model developed by Metcalfe. It is shown that sunk costs influence industry dynamics by reducing the speed of the replicator dynamics of competitive selection. Based on the theoretical model, we argue that sunk costs should lead to a reduction of market share reallocation dynamics and a larger share of stable firms. We validate these predictions empirically, finding that higher-sunk-cost industries have a larger share of stable firms and display lower market share dynamics. The result has practical implications for the interpretation of productivity decompositions.
Article
Full-text available
Enterprise policy is increasingly favouring support for high growth firms (HGFs). However, this may be less effective in promoting new jobs and economic development in peripheral regions. This issue is addressed by a study of HGFs in Scotland. Scottish HGFs differ in a number of respects from the stylised facts in the literature. They create less employment than their counterparts elsewhere in the UK. Most have a significant physical presence outside of Scotland, thereby reducing their Scottish ‘footprint’ and domestic job creation. Scottish HGFs appear to have a high propensity to be acquired, increasing the susceptibility of the head office to closure. The evidence suggests that the tendency towards ‘policy universalism’ in the sphere of entrepreneurship policy is problematic.
Article
Full-text available
Articles appearing in the mainstream entrepreneurship literature in the past decade are reviewed with respect to the methodologies employed. Journals reviewed include Entrepreneurship Theory and Practice, Journal of Business Venturing, Strategic Management Journal, Journal of Management, Academy of Management Journal, Academy of Management Review, Organization Science, Management Science, and Administrative Science Quarterly. Articles were systematically analyzed. Results indicate trends toward more multivariate statistics and some increase in the emphasis on reliability and validity over the past decade. The authors call for greater emphasis on multiple source data sets, increased emphasis on reliability and validity issues, the development of more sophisticated theoretical models and subsequent analysis, and more longitudinal research.
Article
Full-text available
According to recent studies applying Resource-Based Theory [RBT] to entrepreneurial firms (e.g. Chandler & Hanks, 1994; Brush & Greene, 1996), In the early stages of new venture development It is the identification and acquisition of resources-rather than deployment or allocation activities-that Is crucial for the firm's long-term success (Stevenson & Gumpert, 1985). This study explores that relationship longitudinally, tracking salient resources in three rapidly growing new ventures, and analyzing how these resources change over time. Our findings Identify the most common types of salient resources, the primary types of changes In resource and resource bundles, and a pattern linking the type of change with short-term performance results In each firm.
Chapter
The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution path(s) it has adopted or inherited. The importance of path dependencies is amplified where conditions of increasing returns exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding internally) and imitability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing internal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants. (1997 by John Wiley & Sons, Ltd.)
Article
Strategies for attaining competitive advantages emphasize developing and configuring existing resource strengths into a valuable and unique resource base. But what if you do not yet have a legacy of resource strengths? Entrepreneurs in emerging organizations must first assemble resources, then combine them to build a resource platform that will yield distinctive capabilities. The case studies included in this article illustrate the challenges entrepreneurs confront in identifying, attracting, combining, and transforming personal resources into organizational resources. We offer two analytical tools for assessing initial resource needs and developing a resource strategy that can enhance possibilities for wealth creation. Our pathway approach provides guidance for entrepreneurs constructing a resource base.