Performance and Strategy: Simultaneous Equations Analysis of Long-lived Firms

Abstract

A simultaneous equations model of performance, strategy and size is tested using fieldwork evidence on long-lived firms in Scotland. Estimation is by I3SLS, with correction for sample selection bias. The contributions of this paper are that it: (a) grounds estimation on fieldwork evidence; (b) calibrates performance and competitive strategy; (c) tests and models endogeneity; and (d) computes robust trade-off elasticities between firm size and performance. It shows how this trade-off provides the entrepreneur with two strong incentives: (i) to seek greater efficiency typically by an increase in the human capital of the 'core' workforce; (ii) to achieve higher levels of performance by adopting more diverse competitive strategies. AbstractA simultaneous equations model of performance, strategy and size is tested using fieldwork evidence on long-lived firms in Scotland. Estimation is by I3SLS, with correction for sample selection bias. The contributions of this paper are that it: (a) grounds estimation on fieldwork evidence; (b) calibrates performance and competitive strategy; (c) tests and models endogeneity; and (d) computes robust trade-off elasticities between firm size and performance. It shows how this trade-off provides the entrepreneur with two strong incentives: (i) to seek greater efficiency typically by an increase in the human capital of the 'core' workforce; (ii) to achieve higher levels of performance by adopting more diverse competitive strategies. JEL: C42, D21, G33, L2, M13, M21 firm achieves only moderate growth and often remains small (i.e. less than 50 employees: 2003/361/EC-definition), or even contracts. Though fast growing firms provide new employment in the small firm sector 1 , long-lived small firms provide continued employment in communities, and create positive externalities over time. Many barriers to growth of the small entrepreneurial firm (e.g. financial, motivational, organizational) have been identified (Coad and Tamvada 2012; Davidsson, Achtenhagen and Naldi 2010; Wiklund, Shin and Taejong 2003; Henrekeson and Johnsson 1999; and Heneman, Tanksy and Camp 2000) but further study is required of how they inhibit growth, see Barber, Metcalfe and Porteous (1989) and Petrakis (1997). Size has different significance for large compared to small firms. For example, Lee (2009) has found that for large publically traded US companies there is a positive relationship between size and performance. The importance of both initial start-up size (Mata and Portugal 1994; and Strotmann 2007) and current size (Mata, Portugal and Guimarães 1995) have been emphasised in studies of small firm survival and post-entry growth, yet the tendency for firms to remain small has been neglected.Contrary to Lee's (2009) findings for large firms, in small firms a control motive by the entrepreneur can limit output growth, denying the firm efficiency gains from growth. Given fixity of the entrepreneurial input, limits (e.g. of cognition) to the span of control encourage diminishing returns. This leads to a trade-off bet...

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