DP2092 The Growth of Firms in Theory and in Practice

Author(s): Paul A Geroski

Publication Date: March 1999

Keyword(s): Gibrat's Law , Growth

JEL(s): L1

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP2092.asp

This paper is a reflective survey of past and recent econometric work on the growth of firms. Most of this work suggests that firm size follows a random walk; i.e. that corporate growth rates are random. The survey documents this, and shows what a strong result this is by contrasting it with several alternative (and rather obvious) models which might be used to explain corporate growth rates but which are basically inconsistent with the data. The survey also discusses complementary evidence on corporate innovation rates and adjustment costs in investment/employment decisions which is consistent with (and therefore provide some support for) these results. This particular result is striking for a number of reasons, not least because it is basically inconsistent with most theories of the growth of firms which have be developed over the years. It is also inconsistent with the recently fashionable resource based theory of the firm. The second half of this essay identified how and why these theories of growth seem to be inconsistent with the data.