A Survey of Theories and Empirical Evidence
Chapter 10: Growth of Small and Large Firms
The growth of small firms is often seen as having a beneficent character, often being taken as a goal for policy intervention. Small firms are often portrayed as being dynamic and innovative, playing a key role in generating new employment opportunities. In contrast, it appears that the growth of large firms is often implicitly put in a bad light – questions of market power, unfair competition, or managerialist ‘empire-building’ are frequently raised. (In our view, however, the growth of ‘good’ firms should be encouraged and the growth of ‘bad’ firms discouraged – regardless of whether these firms are large or small.) An emphatic contribution in favour of small firms was made by Birch (1987), who suggested that the majority of net new jobs in the US between 1968 and 1976 were created by firms with 20 or fewer employees. Birch coins the term ‘gazelles’ to refer to high-growth small firms – firms that, he argued, created a large share of new employment. Birch’s analysis has been forcefully criticized by a number of authors, however. Prominent among Birch’s critics are Davis et al. (1996), who identify a number of statistical problems in Birch’s analysis. It seems that whether or not small firms generate the bulk of new jobs is very much dependent on the statistical methodology employed (Davidsson and Delmar, 2006). In our view, it is overly simplistic to view small firms as the main source of new job creation. In reality, only a fraction of small firms are truly innovative, their ability to...
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