Size, Growth, Profits, and Executive Compensation in the Large Corporation: A Study of the 500 Largest United Kingdom and United States Industrial Corporations

By David J. Smyth; William J. Boyes | Go to book overview

4 Size and Growth
of Firms

I INTRODUCTION

A question of major importance in industrial organisation is whether the size of a firm has any influence on its growth rate — that is, do large firms grow faster relatively than small firms or vice versa? This topic is the subject of the present chapter.

The typical size distribution of firms is positively skewed with a few large firms and many small firms so that the size distribution of firms is clearly not normal — see Hart ( 1962). In practice this skewness can often be removed by plotting the frequencies against the logarithm of size, resulting in a curve approximating the normal curve so that the original distribution may be deemed log normal — see Adelman ( 1958) and Hart ( 1962).

A normal curve is generated when a large number of small independent random forces act on a variable in an additive manner and a log-normal curve can be generated if they act multiplicatively. In the present context, this means that the determinants of the growth of firms tend to change the size of firms by randomly distributed proportions. Some forces make for an increase in the size of the firm, some make for a decrease but all act randomly in the sense that there is no tendency to favour or disfavour firms of any particular size. Gibrat ( 1957) proposed a 'law of proportionate effect' which stated that the proportional change in the size of a firm is independent of its absolute size, in other words that large and small firms have the same average proportionate rates of growth. This is contrary to the idea that over time large firms are dominating an increasing share of the market, i.e. that concentration is increasing, which forms the basis for anti-trust and anti-monopoly legislation in the United States and the United Kingdom. Of course, it is also contrary to the idea that the size of firms tend to equalise over time or that some optimal firm size exists for combining inputs to produce outputs.

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