Research on Small Firm Growth: A Review

Abstract

Studies of small firm growth are no longer short in supply. On the contrary, as demonstrated by recent reviews, dozens and dozens of empirical research studies on this topic can be compiled. This does not necessarily mean that we know everything we want to know about small firm growth. In fact, all of the authors of recent review articles complain that a coherent picture is not easy to distil from the material. This is likely due to differences in theoretical and epistemological perspectives and interpretations; operationalizations; empirical contexts; modelling and analysis approaches, as well as the inherent complexity of the phenomenon itself. Thus, not only a superficial but also a rather deep reading of the extant literature easily leaves the reader confused and wondering. Admitting that, we will focus in this paper on the fact that significant progress has been made and that we do actually know quite a bit now about the phenomenon of small firm growth; its antecedents and effects, and how it can or should be studied. It is not possible within the confines of a conference paper—and possibly outside the capacity of these authors—to give a complete account of that knowledge. What we will attempt is a summary of points of convergence within some key themes. We first discuss the nature of the phenomenon of small firm growth and its relation to entrepreneurship. Here we discuss the fact that the concept ‘growth’ is used both for ‘change in amount’ and for the process that leads to that change. We also note that part of the reason for lack of coherence in previous research is the heterogeneous nature of growth; firms can expand along different dimensions and show many different growth patterns over time. As regards the relationship between growth and entrepreneurship we conclude that at least early growth of new ventures is part of the entrepreneurship phenomenon. We then move on to how growth can best be assessed. This involves decisions about number of time periods; choice of specific indicator(s) and growth formulae, and the like. We conclude that ideally, growth should be assessed as size changes over multiple periods, preferably in a concurrent, longitudinal design. While sales growth is the most generally applicable measure, theoretical and industry-specific concerns should also influence the choice of indicator(s). A major section is devoted to the long list of internal and external factors that have been hypothesized and shown to influence firm growth. It is probably the case that every theoretically reasonable suggestion for a growth determinant has been shown to have the predicted impact in some context. We argue that the problem is to develop better knowledge about the relative and combined effects of the many predictors under different circumstances. One way to deal with this problem is to increase the level of abstraction and regard the many particularities as aspects of more over-riding factors, some of which influence growth directly while others only have an indirect impact. Another is to give up ambitions of approaching full explanation but instead enhance our understanding of the interplay among a smaller set of specific factors. A third is to limit the study to a more homogenous empirical context and generalize only to that context until replications have shown broader generalization is warranted. We then turn to how small firms grow, if at all. This concerns issues of organic vs. acquisition-based growth; internationalisation; integration; diversification, etc. One striking result here is the very marked difference between young and small vs. large and mature growing firms in that the former mainly grow organically while the latter achieve the bulk of their growth through acquisitions. This has some overlap with the next topic, which is ‘growth stages and transitions’, but as the latter is a relatively separate stream in the literature we keep it as such. We note that the critique of this literature seems to have led not to better research but to no research at all in this stream more recently. This is unfortunate because it represents the type of knowledge small firm managers typically need and demand. Before concluding, we also treat the relationship between growth and profitability. Surprisingly few studies have investigated this crucial relationship. Recent findings indicate that firms that grow successfully do so by first securing profitability, and then go for growth. This is strong reason to caution against a universal and uncritical growth ideology. As it appears, firms that grow at low profitability often end up in the undesirable state of low growth and low profits instead. This also puts small-firm managers’ widespread reluctance to pursue growth in a different light. Finally, we conclude the paper with a summary of what our review implies for the design of further studies on small firm growth