Thursday, September 4, 2014

If small firms cannot grow in isolation, how extended should be its social network?

Can a small firm plot its own growth in isolation, relying solely on its efficiency and technology? Competition rewards the least cost producer, increasing its market share and profits, but when a small firm neglects the benefits of peer group social interactions, both within and across the industry, it could be working to its peril.

Gibrat’s law might state that firm size growth is a random process, yet the jury is out and other considerations could supplant chance in creating a path for the growth of small firms.

These considerations deal with both the characteristics of the firm and that of its environment.

In contrast, in a recent study based on manufacturing firms in a developing economy, Tunisia, the author, Amara Mohammed, concludes that Gibrat’s law does not hold; that is, small firms do not grow faster than larger firms because they are small. On the other hand, young firms were found to grow faster than older ones and for that growth to be sustained, they need a more closed network.

This blog piece was inspired by the paper published by Amara Mohammed in the Economics Bulletin, Volume 34, Issue 1, titled: Gibrat’s Law and peer group effect: the case of Tunisian small manufacturing companies.

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