The Growth of Firms

The Growth of Firms

A Survey of Theories and Empirical Evidence

New Perspectives on the Modern Corporation series

Alex Coad

Much progress has been made in empirical research into firm growth in recent decades due to factors such as the availability of detailed longitudinal datasets, more powerful computers and new econometric techniques. This book provides an up-to-date catalogue of empirical work, as well as a coherent theoretical structure within which these new results can be interpreted and understood. It brings together a large body of recent research on firm growth from a multidisciplinary perspective, providing an up-to-date synthesis of stylized facts and empirical regularities. Numerous empirical findings and theories of firm growth are also surveyed and compared in order to evaluate their validity.

Chapter 8: Theoretical Perspectives

Alex Coad

Subjects: economics and finance, evolutionary economics, industrial organisation


In the following we briefly present five distinct theoretical perspectives, discussing their predictions for firm growth and judging them according to the available empirical evidence. These five theories are the neoclassical theory (in particular, propositions based on the notion of an ‘optimal size’), Penrose’s (1959) ‘theory of the growth of the firm’, the managerial approach, evolutionary economics and its principle of ‘growth of the fitter’, and also the population ecology approach. 8.1 NEOCLASSICAL NOTIONS OF AN ‘OPTIMAL SIZE’ Although the term ‘neoclassical’ encompasses a large and vaguely defined body of literature, for the purposes of our discussion on firm growth we consider that the main prediction emerging from the traditional neoclassical perspective is that firms are attracted to some sort of ‘optimal size’ (Viner, 1932). This optimal size is the profit-maximizing level of production, in which economies of large-scale production are traded off against the costs of coordinating large bureaucratic organizations. In this view, firm growth is merely a means of attaining this ‘optimal size’, and it is of no interest per se. Once firms have reached their optimal size, they are assumed to grow no more.1 It is relevant to mention here the well-known transaction costs theory of the firm, which began with Ronald Coase’s seminal article (Coase, 1937). To summarize briefly, this theory considers that the optimal boundaries of the firm are determined in a trade-off between the advantages of coordination via authority in a hierarchy versus the advantages of coordination through the price mechanism. If transaction costs...

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