Academic journal article Researchers World

Drivers of Firms' Growth: A Case Study of Pakistani Software Firms

Academic journal article Researchers World

Drivers of Firms' Growth: A Case Study of Pakistani Software Firms

Article excerpt

ABSTRACT

This study identified the drivers of firm's growth such as research & development (R&D), absorptive capacity, knowledge management, networks, access to finance, internationalisation and so forth. This empirical paper analyse the Pakistani software industry and provided contribution to research related to micro analysis of small software firms using cross sectional data techniques. Based on a face to face interview of 69 software firms, this study found that firm size, access to finance, internationalisation (exporting and outward FDI), business improvement methods, and knowledge management have a positive impact on the firm's labour productivity growth. In comparison, firm undertaking R&D and absorptive capacity showed negative association with labour productivity growth. In summary, this empirical study suggests that high sunk costs, low investment in knowledge-based assets and shortage of skills generally affect the labour productivity of these software firms.

Keywords: Absorptive capacity, Innovation, Labour Productivity, R&D, SMEs.

INTRODUCTION:

In the literature, researchers have investigated two different views on the role of small & medium enterprises in developing countries. First, there is view that SMEs have a positive impact on an economy, for example, SMEs provide jobs, reduce the poverty level and make significant contribution to national income (Moktan, 2007). In comparison, some researchers (Beck and Kunt et al. 2005) state that SMEs provides poor quality jobs, are not innovative and that their financial constraints may affect their performance. These two different arguments from the literature motivated this research study to investigate the following research questions: Why are SMEs less productive? What are the drivers of firm growth? What type of resources can make SMEs more productive? To answer these questions this research paper is informed by an extensive literature survey and an empirical analysis.

Previous studies (Harris and Trainor, 1995) were limited in approach to analyse the determinants of labour productivity growth and showed a research gap at micro level analysis of software firms. These software firms are mainly comprises SMEs and have higher innovation abilities because of qualified IT professionals and better organisation capabilities (Matusik and Heeley, 2005). Furthermore, these knowledge intensive firms have a strong linkages with other sectors of the economy such as banking sector, airline industry, and the manufacturing sector, which improve the productivity of all firms, whether small or large firms (Westhead, 1997). However, the growth of this knowledge intensive sector requires investment in organisation capabilities such as to improve management and innovation abilities and human capital (De and Dutta, 2007). In addition, knowledge -based view of firm suggests that "investment in knowledge-based assets (R&D, skills and networks) would improve the firm's performance (Harris, 2008).

This paper has been divided into 4 sections; section 2 discusses the literature examples on firm characteristics including long term obstacles to the success of their business. Section 2.1 provides discussion on drivers of firm's growth such as: absorptive capacity, R&D, access to finance, internationalisation and so forth. Section 3 present research methodology and empirical analysis (factor and regression analysis). Lastly, section 4 discusses the conclusion and policy implications, limitation of this empirical study.

LITERATURE REVIEW:

(I) FIRM CHARACTERISTICS:

Heshmati (2001) identified important determinants of firm growth such as firm size, age, ownership and capital structure, R&D and human capital. For example, Aw (2002) investigated the link between firm size and productivity on Taiwanese manufacturing firms. Aw (2002) found that firm grows because of their high productivity; in particular, smaller firms can have higher productivity if sunk costs of entry and exit are low which will strengthen their market selection process. …

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