The growth of smes in a small economy
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The Growth of SMES in a Small Economy. Adreene Staines Doctoral Student Lancaster University, UK November 4, 2004 ISISA, Islands of the World VIII Kinmen Island. FIRM GROWTH IN SMALL STATES. The Antecedents. Firm growth is independent of firm size Law of proportionate effect

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The Growth of SMES in a Small Economy

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The growth of smes in a small economy

The Growth of SMES in a Small Economy

Adreene Staines

Doctoral Student

Lancaster University, UK

November 4, 2004

ISISA, Islands of the World VIII

Kinmen Island


Firm growth in small states

FIRM GROWTH IN SMALL STATES

The Antecedents

  • Firm growth is independent of firm size

    • Law of proportionate effect

  • Firm growth is inversely related to firm size

    • Minimum efficient scale

  • Firm growth is positively related to firm size

    • Market concentration

  • Firm growth is inversely related to firm age

    • Jovanovic (1982) learning model


The growth of smes in a small economy

FIRM GROWTH IN SMALL STATES

Limitations of Existing Theories on Firm Growth

  • Size of firms

    • Strong bias towards large entities

  • The Size Assumption

    • Firm size is the main determinant of firm growth

  • Origins in large developed economies

    • Ignores specific characteristics of developing economies


Firm growth in small states1

FIRM GROWTH IN SMALL STATES

The Case of a Small Developing Economy

  • Prevalence of small firms

    • Constraints to small firm survival and growth

  • Sector specialisation

    • Limited industrial policy choices

  • Developing country traits

    • Undeveloped capital markets, high input costs

  • Openness to trade

    • High export and import levels


Firm growth in small states2

FIRM GROWTH IN SMALL STATES

Key Hypotheses

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

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

  • Exporting is expected to influence the firm growth process.


The growth of smes in a small economy

Classification of Data Sample

1997 Sales Levels

#of FirmsMean SizeStd. Deviation

All firms:602596.954725.64

By sector:

Manufacturing282360.534194.44

Financial Services172180.322653.08

Other153510.457135.90

By Export Status:

Exporters312891.244749.15

Non-exporters292282.364763.64

Sales Size Class

Small (< J$160Mn)20112.76131.79

Medium(J$161 – 900Mn)20746.09483.82

Large (>J$901Mn)206931.996261.84


Firm growth in small states3

FIRM GROWTH IN SMALL STATES

Firm Growth Models

  • Basic Growth Model

    • Firm Growth = F(Firm Size, Firm Age)

  • Expanded Growth Model

    • Firm Growth = F(Firm Size, Firm Age, X)

    • Where X represents certain institutional and structural variables that are expected to influence the firm growth process in small developing economies.


The growth of smes in a small economy

Variables

  • Dependent Variable

    • Average annual logarithmic growth rate of CPI deflated sales for period 1997 - 2002

  • Explanatory variables

    • Firm Size (log CPI deflated sales for 1997)

    • Firm Age (year of establishment to 1997)

    • Size Class (size class of firm based on employment #)

    • Export status

    • Export sales (income from exports)

    • Type of ownership

    • Sector classification

    • Location

    • Information technology communication usage


The growth of smes in a small economy

Econometric Results for Sales Growth over Period 1997 - 2002

BasicExtendedFinal

Size- 0.007 (.026)-0.028 (.032)

Age **-0.136 (.053)-0.089 (.063)

Export-0.001 (.051)

Expsales 0.025 (.032)

Web 0.029 (.042)

Local-0.058 (.049)

Location 0.035 (.049)

Finserv 0.062 (.052) ***0.097 (.035)

Manu-0.020 (.050)

Small0.136 (.178) ***0.325 (.124)

Large 0.048 (.051)

* Significance at 10% level

** Significance at 5% level

*** Significance at 1% level

Standard errors are in parentheses.


Firm growth in small states4

FIRM GROWTH IN SMALL STATES

Small and Medium Sized Firms Only

CoefficientStandard Error

Size- 0.046*** (.014)

Location.118***(.057)

Finserv.141***(.048)

R2.303


Firm growth in small states5

FIRM GROWTH IN SMALL STATES

Concluding Comments

  • Firm size in general does not influence firm growth

  • Firm sector classification matters

    • Financial services is associated with positive growth

    • Manufacturing is associated with negative growth

  • Size (measured by employment numbers) matters.

    • Firms with less than 10 employees experience high growth


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