the growth of smes in a small economy adreene staines doctoral student lancaster university, uk...

The Growth of SMES in a Small The Growth of SMES in a Small EconomyEconomy

Adreene StainesAdreene Staines

Doctoral StudentDoctoral Student

Lancaster University, UKLancaster University, UK

November 4, 2004November 4, 2004

ISISA, Islands of the World VIIIISISA, Islands of the World VIII

Kinmen IslandKinmen Island

FIRM GROWTH IN SMALL FIRM GROWTH IN SMALL STATESSTATES

• Firm growth is independent of firm sizeFirm growth is independent of firm size– Law of proportionate effectLaw of proportionate effect

• Firm growth is inversely related to firm Firm growth is inversely related to firm sizesize– Minimum efficient scaleMinimum efficient scale

• Firm growth is positively related to firm sizeFirm growth is positively related to firm size– Market concentrationMarket concentration

• Firm growth is inversely related to firm ageFirm growth is inversely related to firm age– Jovanovic (1982) learning modelJovanovic (1982) learning model

The Antecedents

• Size of firmsSize of firms– Strong bias towards large entitiesStrong bias towards large entities

• The Size AssumptionThe Size Assumption– Firm size is the main determinant of firm growthFirm size is the main determinant of firm growth

• Origins in large developed economiesOrigins in large developed economies– Ignores specific characteristics of developing Ignores specific characteristics of developing

economieseconomies

Limitations of Existing Theories on Firm Growth


• Prevalence of small firmsPrevalence of small firms– Constraints to small firm survival and growthConstraints to small firm survival and growth

• Sector specialisationSector specialisation– Limited industrial policy choicesLimited industrial policy choices

• Developing country traitsDeveloping country traits– Undeveloped capital markets, high input costsUndeveloped capital markets, high input costs

• Openness to tradeOpenness to trade– High export and import levelsHigh export and import levels

The Case of a Small Developing Economy


• If the observed negative relationship between If the observed negative relationship between firm size and firm growth is independent of firm size and firm growth is independent of domestic market size, Jamaican small firms will domestic market size, Jamaican small firms will exhibit higher growth rates than their larger exhibit higher growth rates than their larger counterparts.counterparts.

• The sector in which a firm operates in a small The sector in which a firm operates in a small economy is expected to influence its growth rate.economy is expected to influence its growth rate.

• Exporting is expected to influence the firm Exporting is expected to influence the firm growth process.growth process.

Key Hypotheses


1997 Sales Levels1997 Sales Levels## of Firmsof Firms Mean SizeMean Size Std. DeviationStd. Deviation

All firms:All firms: 6060 2596.952596.95 4725.644725.64By sector:By sector:

ManufacturingManufacturing 2828 2360.532360.53 4194.444194.44Financial ServicesFinancial Services 1717 2180.322180.32 2653.082653.08OtherOther 1515 3510.453510.45 7135.907135.90

By Export Status:By Export Status:

ExportersExporters 3131 2891.242891.24 4749.154749.15Non-exportersNon-exporters 2929 2282.362282.36 4763.644763.64

Sales Size ClassSales Size Class

Small (< J$160Mn)Small (< J$160Mn) 2020 112.76112.76 131.79131.79MediumMedium (J$161 – 900Mn)(J$161 – 900Mn)2020 746.09746.09 483.82483.82Large (>J$901Mn)Large (>J$901Mn) 2020 6931.996931.99 6261.846261.84

Classification of Data Sample

• Basic Growth ModelBasic Growth Model– Firm Growth = F(Firm Size, Firm Age)Firm Growth = F(Firm Size, Firm Age)

• Expanded Growth ModelExpanded Growth Model– Firm Growth = F(Firm Size, Firm Age, X)Firm Growth = F(Firm Size, Firm Age, X)– Where X represents certain institutional and Where X represents certain institutional and

structural variables that are expected to structural variables that are expected to influence the firm growth process in small influence the firm growth process in small developing economies.developing economies.

Firm Growth Models


• Dependent VariableDependent Variable– Average annual logarithmic growth rate of CPI Average annual logarithmic growth rate of CPI

deflated sales for period 1997 - 2002deflated sales for period 1997 - 2002

• Explanatory variablesExplanatory variables– Firm Size (log CPI deflated sales for 1997)Firm Size (log CPI deflated sales for 1997)– Firm Age (year of establishment to 1997)Firm Age (year of establishment to 1997)– Size Class (size class of firm based on employment Size Class (size class of firm based on employment

#)#)– Export statusExport status– Export sales (income from exports)Export sales (income from exports)– Type of ownershipType of ownership– Sector classificationSector classification– LocationLocation– Information technology communication usageInformation technology communication usage

Variables

BasicBasic ExtendedExtended FinalFinalSizeSize - 0.007 (.026)- 0.007 (.026) -0.028 (.032)-0.028 (.032)

Age **Age ** -0.136 (.053)-0.136 (.053) -0.089 (.063)-0.089 (.063)ExportExport -0.001 (.051)-0.001 (.051)

ExpsalesExpsales 0.025 (.032)0.025 (.032)WebWeb 0.029 (.042)0.029 (.042)LocalLocal -0.058 (.049)-0.058 (.049)LocationLocation 0.035 (.049)0.035 (.049)FinservFinserv 0.062 (.052)0.062 (.052) *** ***0.0970.097 (.035) (.035)ManuManu -0.020 (.050)-0.020 (.050)SmallSmall 0.136 (.178)0.136 (.178) *** ***0.3250.325

(.124)(.124)LargeLarge 0.048 (.051)0.048 (.051)

* Significance at 10% level* Significance at 10% level** Significance at 5% level** Significance at 5% level*** Significance at 1% level*** Significance at 1% levelStandard errors are in parentheses.Standard errors are in parentheses.

Econometric Results for Sales Growth over Period 1997 - 2002

CoefficientCoefficient Standard ErrorStandard Error

SizeSize - 0.046*** - 0.046*** (.014)(.014)

LocationLocation .118***.118*** (.057)(.057)

FinservFinserv .141***.141*** (.048)(.048)

RR22 .303.303

Small and Medium Sized Firms Only


• Firm size in general does not influence Firm size in general does not influence firm growthfirm growth

• Firm sector classification mattersFirm sector classification matters– Financial services is associated with positive growthFinancial services is associated with positive growth– Manufacturing is associated with negative growthManufacturing is associated with negative growth

• Size (measured by employment Size (measured by employment numbers) matters.numbers) matters.– Firms with less than 10 employees experience high Firms with less than 10 employees experience high

growthgrowth

Concluding Comments


the growth of smes in a small economy adreene staines doctoral student lancaster university, uk...

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