ABSTRACT. This paper examines the determinants of short
run employment growth in very small firms in the Services
sector. The study shows evidence of non linearities in the
growth-size relationship, and it is argued that these non lin-
earities reflect the short run constraints that small firms face
in adjusting to demand shocks. The paper also suggests that
there are other systematic influences on growth apart from
size. The paper draws on survey evidence from the Northern
Region of the United Kingdom.
This paper examines the determinants of short run
employment growth in small firms in the Services
sector. Small firm growth has of course been the
subject of extensive research
(for a good survey,
see Storey, 1994, ch. 5). Some justification for yet
another study is therefore necessary. Such justifi-
cation may be found in four features of this paper.
First, we explore an important and interesting
question that has not been investigated sufficiently
in empirical work to date: the way in which short
run constraints, embodied in the firm’s short run
cost function, influence the dynamics of the
growth process of small firms. Our results are
consistent with such constraints ‘anchoring’ short
run firm growth. Secondly, we focus on firms in
the Services sector,
whereas as Variyam and
Kraybill (1992) have pointed out, most firm
growth studies have been concerned with
Thirdly, we consider growth over a twelve
month period, a time span that is shorter than that
of many other small firm studies (Mata’s work
(1994) is an exception).
This focus is appropriate
from both a managerial and policy viewpoint.
Most owner managers in the kind of very small
firm considered here are unlikely to have a
planning horizon, even of an informal kind,
beyond twelve months,
and policy initiatives will
need to reflect that fact. There is also evidence to
suggest that a twelve month planning horizon is a
major concern of bank managers when assessing
funding requests from new small firms (Deakins
and Hussain, 1993).
For these reasons, insights
into the determinants of growth over the period
of a year are likely to be important. This will be
particularly true for the newest firms which may
be able to survive for a short initial ‘honeymoon’
period, but which need to grow beyond their initial
size if they are to survive once this period is over.
Finally, our study largely concentrates on micro
businesses, most of them with less than five
employees (see section 3 below). A number of
studies of firm growth are of course based on
coverage of the full size range, including small
size bands, but these studies do not provide the
kind of focus on very small firms that is provided
here. Reid’s study (1995) of 73 ‘small entrepre-
neurial’ firms in Scotland, in which 78 per cent
of the sample had between one and ten employees
(Reid, 1993, p. 192), is more relevant for our
purposes, but it is an exception.
The plan of this paper is as follows. In section
2 we discuss considerations that underlie the
growth equation that we estimate. Section 3
describes the data and variables which come from
a survey of firms in the North of England. Some
empirical results are presented in section 4.
The final section discusses the results of the
study, and makes some suggestions for further
Small Business Growth
in the Short Run
Small Business Economics 12: 103–112, 1999.
1999 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on April 28, 1998
Department of Economics
University of Durham
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Durham DH1 3HY