Gibrat's Law: Are the Services Different?

Abstract

Several noted surveys on intra-industry dynamics have recently reached the conclusion from a large body of evidence that Gibrat's Law does not hold. However, almost all of these studies have been based on manufacturing. There are compelling reasons to doubt whether these findings hold for the services. In this paper we examine whether the basic tenet underlying Gibrat's Law-that growth rates are independent of firm size-can be rejected for the services as it has been for manufacturing. Based on a large sample of Dutch firms the evidence suggests that growth rates are, in fact, independent of firm size. Validation of Gibrat's Law in the services suggests that the dynamics of industrial organisation for services may not simply mirror that for manufacturing. 5001-6182 Business 5546-5548.6 Office Organization and Management Library of Congress Classification (LCC) HD 9980-9990 Service industries M Business Administration and Business Economics L 20 Firm Objectives, Organization and Behavior: general Journal of Economic Literature (JEL) D 21 Firm Behavior 85 A Business General 270 A 100 G Strategic Management Organizational Growth European Business Schools Library Group (EBSLG) 160 D Industrial/ managerial economics, theory of the firm Gemeenschappelijke Onderwerpsontsluiting (GOO) 85.00 Bedrijfskunde, Organisatiekunde: algemeen 85.10 Strategisch beleid Classification GOO 85.10 Strategisch beleid Bedrijfskunde / Bedrijfseconomie Strategisch management, organisatievernieuwing

The effect of institutional development on the growth of Brazilian firms

“…Survivorship bias is an all important issue in the study of firm's growth (Audretsch et al, 2004): negative growth for a large firm means that the firm will be smaller in period t than it was in period t − 1 but it will likely survive. Negative growth for a small firm may imply bankruptcy.…”

Towards a new framework for SMEs success: a literature review

“…Overall, empirical evidence shows that the relationship between small business growth and firm size is still inconclusive. A line of studies conclude that SMEs growth is independent of size as per Gibrat's Law or 'Law of Proportionate Effect' (Gilbrat, 1931), suggesting that it is a random phenomenon (Das, 1995;Diaz-Hermelo and Vassolo, 2008;Lotti et al, 1999;Piergiovanni et al, 2002) while others argue the converse (Almus and Nerlinger, 2000; Audretsch et al, 2004;Calvo, 2006;Cefis et al, 2007;Farinas and Moreno, 2000;Hart, 2000;Yasuda, 2005).…”

Testing relationships between firm size and perceptions of growth and profitability: An investigation into the practices of Australian ICT SMEs

“…Audretsch et al (2004) conduct a review of extant literature to review empirical evidence for this theorem.…”

“…Empirical evidence for (Audretsch, Klomp, Santarelli & Thurik, 2004;Davidsson et al, 2006;Reid, 2007) and against (Baum et al, 2001;Szerb & Ulbert, 2006;Bentzen, Madsen & Smith, 2012;Daunfeldt & Elert, 2013) Gibrat's Law is available in literature dependent on the industry of the study, highlighting the importance of context specific factors. Firm size measured introduced were a combination of annual sales/turnover (Audretsch et al, 2004;Bentzen, Madsen & Smith, 2012;Daunfeldt & Elert, 2013), asset value (Reid, 2007), and number of employees (Baum et al, 2001;Daunfeldt & Elert, 2013;Davidsson et at., 2006;Szerb & Ulbert, 2006). Thus, Gibrat's Law and the profit-growth relationship imply a further question with regards to the relationship between firm size and profitability.…”

“…For the purposes of investigation, it has been determined that it is advantageous to choose a population from a particular country and industry, eliminating cross-industry variation. Audretsch et al (2004) for instance investigate the services sector, Daunfeldt and Elert (2013) study innovative sectors, others explore manufacturing (Lee, 2009) and non-manufacturing (Bhattacharyya & Saxena, 2013) sectors, deriving a variety of conclusions. Focusing on ICT firms promises in terms of being subject to research is its inherent dynamism, and the likelihood of providing a context in which the study can go beyond the mere statistical confirmation of Gibrat's Law.…”