ABSTRACT. We present an empirical analysis of the deter-
minants of growth for a sample of Italian small and medium
sized firms. We show that, when investigating a sample which
includes firms between 10 and 50 employees and a set of vari-
ables larger than those usually considered in the literature,
growth – net of industry characteristics and ex ante market
power – turns out to be significantly affected not only by
size and age, but also by state subsidies, export capacity and
credit rationing. By adopting a multivariate approach we also
show that these findings are confirmed after controlling for
heteroskedasticity, survivorship bias and serial correlation.
Our results suggest that the hypothesis of independence of firm
growth from the initial size and other factors (usually referred
to as Gibrat’s law in the literature) is not rejected for large
firms, while it does not hold for small and medium sized firms
under financial constraints in a “bank-oriented” financial
system in which access to external finance is difficult.
1. Introduction
Since 1931, when it was first formulated, Gibrat’s
law has been a useful theoretical benchmark for
theoretical and empirical research on the determi-
nants of firm growth. Its two main points may be
summarised as follows: (i) the rate of growth of a
firm is independent from its size at the beginning
of the period; (ii) the probability of a given rate
of growth during a specific time interval is the
same for any firm within the same industry. It is
worth noting that the second point is more general
than the first one and it implies that, after con-
trolling industry characteristics, the expected
growth rates should not be affected by any other
variable.
Most empirical analyses reject the hypothesis
of independence of growth from size and age.
Firm growth is significantly and negatively related
to size and age when only surviving firms are con-
sidered and, to a lesser extent, when survivorship
bias is taken into account. The paucity of avail-
able data prevented investigation in other direc-
tions of interest. More detailed empirical analysis
of the determinants of growth going beyond the
traditional size-age-growth relationship should be
of great relevance both for economists and poli-
cymakers. To consider an example, the relation-
ship among firm size, availability of external
finance, access to foreign markets and ownership
structure has been largely neglected even though
it may provide significant policy insights on the
optimal corporate governance and regulation of
financial institutions in support of industrial and
economic growth. This paper aims to fill this gap
by considering a large set of potential determinants
of firm growth. The paper is divided into five
sections (including introduction and conclusions).
In the second section we briefly describe theoret-
ical and empirical findings showing that a signif-
icant impact of size and age on firm growth has
been found for different countries and estimation
periods. In the third section we present some
The Determinants of Growth for
Small and Medium Sized Firms.
The Role of the Availability of
External Finance
Small Business Economics 19: 291–306, 2002.
2002 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on August 15, 2001
Leonardo Becchetti
Università Tor Vergata
Facoltà di Economia
Dipartimento di Economia e Istituzioni
00133 Roma, Italy
E-mail: becchetti@economia.uniroma2.it
and
Giovanni Trovato
Fondazione CaRiSal
Corso Garibaldi 194
84100 Salerno
E-mail: g_jov@inwind.it
Leonardo Becchetti
Giovanni Trovato
@Phil_Robichaud
@deepthiw
@JoseServera