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Is the growth volatility of business firms tied-up with their size?

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Flavio Calvino, Chiara Criscuolo, Carlo Menon and Angelo Secchi

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Since the pioneering work of the French engineer Robert Gibrat, economists have been interested in studying the statistical properties of the size of business firms and of its evolution over time. While it is a well-known stylized fact that small and young firms tend to grow faster than larger incumbents, less research has focused on the relation between a firm’s size and its growth volatility. In particular it is not clear if any relation between size and growth volatility exists and if this relation appears similar across different countries. In tackling these two issues this research provides the first systematic cross-country investigation of the relation between a firm’s growth volatility and its size exploiting an original data source containing comparable and representative data on business firms.(1)

Our results show that there exists a robust negative relation between the volatility of growth and size. The “scaling coefficient” linking these two dimensions of the firm is found to be approximately equal to -0.2 meaning that an increase by 10% of a typical firm’s size is accompanied by a 2% decrease of its growth volatility. This relation is not entirely driven by firms’ age profile and, more importantly, appears quite homogeneous across more than 20 countries with diverse institutional settings and at different stage of development. This reduction of growth volatility with size is then interpreted in terms of the overall resilience of the economy, ceteris paribus: the larger (in absolute terms) the scaling coefficient the more diversified and more resistant against microeconomic shocks the economy should be.

Quantifying the relation between a firm’s size and its growth volatility, and assessing if and to what extent this relation is common across diverse countries, are important for a number of reasons. On a microeconomic level, it can help discriminating among different theories of firm growth generally grounded on the assumption that a firm can be seen as an aggregation of many elementary sub-units. On a macroeconomic level, assessing the existence of this scaling relation is particularly important in granular economies, that is in those economies where few huge companies co-exists with several very small firms. This is typically the case for developed economies like France or the US. In these economies, idiosyncratic shocks hitting large firms increase macroeconomic volatility, boosting GDP fluctuations. However, this impact of microeconomic shocks on aggregate fluctuations is reduced by the extent to which large firms present less volatile growth dynamics. Similarly, in open economies, a precise estimate of the scaling coefficient helps in quantifying how much a trade opening episode (such as cuts in trade barriers) would increase GDP fluctuations. Finally, given that firms operating in more volatile and turbulent competitive environments tend to be more reactive to economic policies, clarifying the link between volatility of growth and size is essential.

(1) This data set has been developed within the Dynemp project at the STI Directorate of the OECD.


Original title of the article: “Growth volatility and size: a firm-level study”

Published in: Journal of Economic Dynamics and Control Volume 90, May 2018, Pages 390-407

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