Growth paths and survival chances: An application of Gambler's Ruin theory

Abstract

We investigate the growth and survival of nascent businesses by analyzing their bank records. We do not find strong evidence in favour of a taxonomy of growth paths, because we observe that every possible growth path seems to occur with roughly equal probability. However, we observe that survival depends on the business' growth path. Controlling for lagged size, we observe that longer lags of growth, and even start-up size, have significant effects on survival. JEL codes: L25

Myth-busting and entrepreneurship policy: the case of high growth firms

“…2 Irrespective of the definition and measurement criteria used to identify HGFs, it is important to note that rapid growth is highly episodic in nature (Garnsey et al 2006) and thus the population of HGFs is constantly fluctuating. High growth is rarely persistent in firms (Nicholls-Nixon 2005;Hölzl 2014) and therefore high growth in one period of time does not guarantee sustained high growth (Coad et al 2013;Daunfeldt and Halvarsson 2015). Hence, it is crucial to bear in mind that high growth is not a 'characteristic' of a sub-set of firms, but rather a state that some firms temporarily experience (Brown and Mawson 2013).…”

“…In other words, explained variance in growth research is notably low" (McKelvie and Wiklund 2010, 277). Thus, some observers claim that deciphering the causal factors underpinning rapid firm growth is as random as a 'coin toss' (Coad et al 2013) and that growth "remains something of an enigma" (Roper and Hart 2013, 11). This myopic focus on HGF growth rates has also largely overlooked crucially important aspects of firm growth, notably firm profitability and sustainability ) and wider productivity ).…”

Entrepreneurship and the determinants of firm survival within regions: human capital, growth motivation and locational conditions

“…However, this does tend to imply that the entrepreneurs themselves have no control over their fates. One particular course of action that could have profound implications for survival is the capability to grow and accumulate sufficient resources to withstand external shocks (Caliendo, Fossen, and Kritikos 2010;Coad et al 2013;Coad et al, 2016). However, a counter argument to this thesis is provided by Delmar, McKelvie, and Wennberg (2013) who find a negative relationship between growth in one period and survival in the next in the case of knowledge intensive start-ups, which they suggest may relate to growth itself being a risky activity.…”

“…The size of the firm is captured by its employment level with firms categorised as micro or small and medium. This is to control for the resources that greater scale provides that have been linked to higher survival through an ability to withstand shocks (Geroski, Mata, and Portugal 2010;Coad et al 2013). Studies such as Boden and Nucci (2000) suggest that businesses started by female entrepreneurs have lower survival rates.…”

“…This may reflect a variety of factors that affect the nature of businesses started such as: risk aversion, labour market experience, direct discrimination, and access to finance (Caliendo, Fossen, and Kritikos 2009;Manning and Swaffield 2008;Gicheva and Link 2013;Mueller and Conway Dato-on 2013). Therefore, a gender dummy is included to control for possible differences in survival rates (although some recent studies find limited roles for gender (Coad et al 2013)). …”