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Entry, gibrat's law, innovation, and the growth of firms

TL;DR: In this paper, the authors provide some tentative answers to the following basic questions regarding the dynamic processes governing an industry's structure: 'What are the quantitative effects of various factors on the rates of entry and exit? How well can the growth of firms be represented by Gibrat's law of proportionate effect?' and 'What have been the effects of successful innovations on a firm's growth rate? What determines the amount of mobility within a industry's size structure?'
Abstract: and death of firms, we lack even crude answers to the following basic questions regarding the dynamic processes governing an industry's structure. What are the quantitative effects of various factors on the rates of entry and exit? How well can the growth of firms be represented by Gibrat's law of proportionate effect? What have been the effects of successful innovations on a firm's growth rate? What determines the amount of mobility within an industry's size structure?' This paper provides some tentative answers to these questions. First, it constructs some simple models to estimate the effects of an industry's capital requirements, profitability, and other such factors on its entry and exit rates. Second, it investigates how well Gibrat's law of proportionate effect can represent the growth of firms in each of the industries for which we have appropriate data. Although this law has played a prominent role in models designed to explain the size distribution of firms, it has been tested only a few times against data for very large firms. Third, we estimate the difference in growth rate between firms that carried out significant innovations and other firms of comparable initial size. The results help to measure the importance of successful innovation as a cause of interfirm differences in growth rates, and they shed new light on the rewards for such innovations. Fourth, the paper presents and tests a simple model to explain interindustry and * The author is associate professor of economics at Carnegie Institute of Technology. This paper, a preliminary version of which was read at the August 1961 meetings of the Econometric Society, will be reprinted as a Cowles Foundation Paper. The work on which it is based is part
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Book
01 Jan 1981
TL;DR: In this paper, the authors provide a theory of selection with incomplete information that is consistent with these and other findings, and give rise to entry, growth, and exit behavior that agrees, broadly, with the evidence.
Abstract: Recent evidence shows that within an industry, smaller firms grow faster and are more likely to fail than large firms. This paper provides a theory of selection with incomplete information that is consistent with these and other findings. Firms learn about their efficiency as they operate in the industry. The efficient grow and survive; the inefficient decline and fail. A perfect foresight equilibrium is proved by means of showing that it is a unique maximum to discounted net surplus. The maximization problem is not standard, and some mathematical results might be of independent interest. 1. THEORY AND EVIDENCE ON THE GROWTH AND SURVIVAL OF FIRMS Do SMALL FIRMS grow faster than large firms? Are they less likely to survive? Early studies found no relation between the size of firms and their growth rates [8, 14, 16]. The growth of firms seemed to be proportional to their size. In later work, adjustment costs with constant returns to scale were shown to imply that firms should grow in proportion to their size [10, 11]. Recent evidence from larger samples tells a different story. Mansfield [13] finds that smaller firms have higher and more variable growth rates. Du Rietz [6], in a sample of Swedish firms, again finds that smaller firms grow faster, and that they are less likely to survive [6,8,13]. These findings conflict with the adjustment costs theory in which all firms grow at the same rate, and in which failure does not happen. To explain these deviations from the proportional growth law, I propose a theory of "noisy" selection. Efficient firms grow and survive; inefficient firms decline and fail. Firms differ in size not because of the fixity of capital, but because some discover that they are more efficient than others. The model gives rise to entry, growth, and exit behavior that agrees, broadly, with the evidence. The model also agrees with some more tentative findings. First, firm size and concentration seem to be positively related to rates of return.2 Second, the correlation over time of rates of return is higher for larger firms and in the concentrated industries [15, 17]. Third, the variability of rates of return at a point in time is higher in the concentrated industries [17]. Finally, higher concentration is associated with higher profits for the larger firms, but not for the smaller firms

2,931 citations

Posted Content
TL;DR: In this article, a model emphasizing differences in firm innovative capabilities and the importance of firm size in appropriating the returns from innovation is developed to explain the regularities concerning how entry, exit, market structure, and innovation vary from the birth of technologically progressive industries through maturity.
Abstract: Regularities concerning how entry, exit, market structure, and innovation vary from the birth of technologically progressive industries through maturity are summarized. A model emphasizing differences in firm innovative capabilities and the importance of firm size in appropriating the returns from innovation is developed to explain the regularities. The model also explains regularities regarding the relationship within industries between firm size and firm innovative effort, innovative productivity, cost, and profitability. It predicts that over time firms devote more effort to process innovation but the number of firms and the rate and diversity of product innovation eventually wither.

2,520 citations

Book ChapterDOI
TL;DR: The authors discusses the perceptible movement of empirical scholars from a narrow concern with the role of firm size and market concentration toward a broader consideration of the fundamental determinants of technical change in industry.
Abstract: Publisher Summary This chapter discusses the perceptible movement of empirical scholars from a narrow concern with the role of firm size and market concentration toward a broader consideration of the fundamental determinants of technical change in industry. Although tastes, technological opportunity, and appropriability conditions themselves are subject to change over time, particularly in response to radical innovations that alter the technological regime, these conditions are reasonably assumed to determine inter-industry differences in innovative activity over relatively long periods. Although a substantial body of descriptive evidence has begun to accumulate on the way the nature and effects of demand, opportunity, and appropriability differ across industries, the absence of suitable data constrains progress in many areas. It has been observed that much of the empirical understanding of innovation derives not from the estimation of econometric models but from the use of other empirical methods. Many of the most credible empirical regularities have been established not by estimating and testing elaborate optimization models with published data but by the painstaking collection of original data, usually in the form of responses to relatively simple questions.

1,710 citations

Journal ArticleDOI
TL;DR: The authors used a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics and found that firm growth, the variability of firm growth and the probability that a firm will fail decrease with firm age.
Abstract: This study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics. It finds that firm growth, the variability of firm growth, and the probability that a firm will fail decrease with firm age. It also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow-growing firms from the sample. Gibrat's Law therefore fails, although the severity of the failure decreases with firm size. Copyright 1987 by Blackwell Publishing Ltd.

1,707 citations

Journal ArticleDOI
TL;DR: This article examined the patterns of postentry employment growth and failure for over 200,000 plants that entered the U. S. manufacturing sector in the 1967-1977 period and found that plant failure rates decline with size and age as do the growth rates of nonfailing plants.
Abstract: This paper examines the patterns of postentry employment growth and failure for over 200,000 plants that entered the U. S. manufacturing sector in the 1967–1977 period. The postentry patterns of growth and failure vary significantly with observable employer characteristics. Plant failure rates decline with size and age as do the growth rates of nonfailing plants. The expected growth rate of a plant, which depends on the net effect of these two forces, declines with size for plants owned by single-plant firms but increases with size for plants owned by multiplant firms.

1,603 citations

References
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Book
01 Jan 1959
TL;DR: In this article, the authors studied the role of large and small firms in a growing economy and found that large firms are more likely to acquire and merge smaller firms in order to increase their size.
Abstract: Introduction Preface 1. Introduction 2. The Firm in Theory 3. The Productive Opportunity of the Firm and the 'Entrepreneur' 4. Expansion Without Merger: The Receding Managerial Limit 5. 'Inherited' Resources and the Direction of Expansion 6. The Economies of Size and the Economies of Growth 7. The Economics of Diversification 8. Expansion Through Acquisition and Merger 9. The Rate of Growth of Firms Through Time 10. The Position of Large and Small Firms in a Growing Economy 11. Growing Firms in a Growing Economy: The Process of Industrial Concentration and the Pattern of Dominance

14,137 citations

Book
01 Jan 1890
TL;DR: In this article, the authors present a survey of the general relations of demand, supply, and value in terms of land, labour, capital, and industrial organization, with an emphasis on the fertility of land.
Abstract: BOOK I: PRELIMINARY SURVEY 1. Introduction 2. The Substance of Economics 3. Economic Generalizations or Laws 4. The Order and Aims of Economic Studies BOOK II: SOME FUNDAMENTAL NOTIONS 1. Introductory 2. Wealth 3. Production, Consumption, Labour, Necessaries 4. Income. Capital. BOOK III: ON WANTS AND THEIR SATISFACTION 1. Introductory 2. Wants in Relation to Activities 3. Gradations of consumers' demand 4. The elasticity of wants 5. Choice between different uses of the same thing. Immediate and deferred uses. 6. Value and utility BOOK IV: THE AGENTS OF PRODUCTION. LAND, LABOUR, CAPITAL AND ORGANIZATION T 1. Introductory 2. The Fertility of Land 3. The Fertility of Land, continued. The Tendency to Diminishing Return. 4. The Growth of Population 5. The Health and Strength of the Population 6. Industrial Training. 7. The Growth of Wealth 8. Industrial Organization 9. Industrial Organization, continued. Division of Labour. The Influence of Machinery 10. Industrial Organization, continued. The Concentration of the Specialized Industries in Particular Localities. 11. Industrial Organization, continued. Production on a Large Scale 12. Industrial Organization, continued. Business Management. 13. Conclusion. Correlation of the Tendencies to Increasing and to Diminishing Return BOOK V: GENERAL RELATIONS OF DEMAND, SUPPLY, AND VALUE 1. Introductory. On Markets. 2. Temporary Equilibrium of Demand and Supply 3. Equilibrium of Normal Demand and Supply 4. The Investment and Distribution of Resources 5. Equilibrium of Normal Demand and Supply, continued, with reference to long and short periods 6. Joint and Composite Demand. Joint and Composite Supply 7. Prime and total cost in relation to joint products. Cost of marketing. Insurance against risk. Cost of Reproduction. 8. Marginal costs in relation to values. General Principles. 9. Marginal costs in relation to values. General Principles, continued 10. Marginal costs in relation to agricultural values 11. Marginal costs in relation to urban values 12. Equilibrium of normal demand and supply, continued, with reference to the law of increasing return 13. Theory of changes of normal demand and supply, in relation to the doctrine of maximum satisfaction 14. The theory of monopolies 15. Summary of the general theory of equilibrium of demand and supply BOOK VI: THE DISTRIBUTION OF THE NATIONAL INCOME 1. Preliminary survey of distribution 2. Preliminary survey of distribution, continued 3. Earnings of labour 4. Earnings of labour, continued 5. Earnings of labour, continued 6. Interest of capital 7. Profits of capital and business power 8. Profits of capital and business power, continued 9. Rent of land 10. Land tenure 11. General view of distribution 12. General influences of progress on value 13. Progress in relation to standards of life

11,519 citations

Journal ArticleDOI

3,174 citations

Journal ArticleDOI

2,873 citations

Book
01 Jan 1956
TL;DR: In this paper, a series of hypotheses as to the conditions of entry, and the probable degree to which they serve as barriers to new competition are presented, and a bold attempt is made to measure the height of these barriers in 20 manufacturing industries.
Abstract: Conditions of entry into markets where sellers are few are analyzed intensively by Professor J. S. Bain in his Barriers to New Competition.1 In the tightly written first chapter the theory of entry is developed far beyond what was previously in the literature. There emerges a series of hypotheses as to the conditions of entry, and the probable degree to which they serve as barriers to new competition. A bold attempt is then made to measure the height of these barriers in 20 manufacturing industries. Predictions stemming from these empirical findings are compared with observed performance of these industries. Finally, the conclusions with respect to the significance of types of entry barriers lead to a number of observations as to public policy. All of this comprehensive analysis is carried out explicitly within the framework of comparative statics. Specifically excluded from the circumstances considered as having a significant effect on entry, and through that on the maximum level of the equilibrium price, are secular or cyclical [or episodic?] movements of demand, capacity or costs. Nor, except for a few notable cases of product innovation, does Bain believe that new sellers are able to alter the condition of entry. Instead, "It is definitely posited for purposes of the present study-on the basis of extensive empirical observation-that the condition of entry as defined and its ultimate determinants are usually stable and slowly changing through time . . ." (p. 18). Such stability is elsewhere said to exist "persistently . . . over a period of time." Repeatedly this or a similar phrase appears to emphasize that observation ex post can be tied conceptually to the ex ante long-term equilibrium. Such stable and slowly changing conditions of entry are held to determine the ceiling price for an industry or the amount by which its price can, persistently, exceed the level ". . . hypothetically attributed to long-run equilibrium in pure competition" (p. 6). The actual persistent level of price may fall short of this entry-inviting level because of the nature of interfirm rivalry. The latter opens up the whole of oligopoly theory, but the author moves into that area only to indicate how the alternative solutions to interfirm rivalry would affect the price expectations of a would-be entrant. Entry is marked off from other sources of capacity expansion by the require-

2,854 citations