Study: How do US firms grow? New evidence from a growth decomposition (DOI: 10.1002/smj.3641)
Organic growth strategies, such as opening new plants or expanding existing operations, play a more significant role in the growth of firms and industries compared to transactional growth strategies, such as mergers, acquisitions and selloffs.
However, transactional growth is more positively correlated with future survival.
The findings come from a study by Jagadeesh Sivadasan, professor of business economics and public policy at the University of Michigan's Ross School of Business. It explores employment growth data from all U.S. companies from 2004 to 2013.
He shares insights from the research, including perspectives on what growth factors help create a more healthy and stable economy.
How do your findings differ from previous understandings of growth modes?
Our framework allows for a comprehensive examination of growth modes to make several novel contributions. Among our findings:
- The typical growth story involves a firm facing opportunities trying to grow through all available modes. That's opposed to when a firm focuses on one mode, say acquisitions, at the expense of others, such as new establishments.
- In response to competition, primarily from the reduction of tariff barriers to Chinese imports, we find firms reduce size through multiple modes: shrinkage of existing establishments, reduction in acquisitions and greater closures and selloffs. Interestingly, there is no decline in growth from new units, suggesting firms continued to experiment.
- Comparing firms in the same sector and of the same size, those that grew more through transactional growth have stronger future growth and survival.
How did the 2008 financial crisis affect growth modes?
While we do not present these results in our paper, our data show several interesting patterns following the Great Recession. Of course, overall employment growth was negative in 2009 and 2010, and recovery was slow.
The bulk of the decline in growth came from layoffs in continuing establishments. Interestingly, there was less job loss from closures compared to pre-2008 levels, but there was a significant slowdown in the entry of new businesses.
We also find a steep fall in the volume of transactional modes. The results suggest the crisis reduced the available pool of buyers for businesses and assets, reducing the benefits from sales and closures.
What new patterns about the growth of firms across size and age categories does your study find?
Among large firms, young firms show slower growth than old ones. That's contrary to the conventional notion younger firms grow faster, but aligns with Edith Penrose's pioneering work suggesting size and growth are limited by managerial expertise.
After a period of growth, firms can be expected to slow down as they need time to build additional expertise. Among small firms, we find that older firms grow slower, in line with conventional wisdom that entrants and young small firms are key sources of growth.
Could you elaborate on the significant correlation you found between transactional growth and future firm survival?
Transactional growth is significantly positively correlated with future growth and survival, whereas growth from organic modes is slightly negatively correlated with survival. One possible explanation is more productive and larger firms attempt acquisitions; another is certain industries experience a period of consolidation from mergers and then growth.
Our analysis controls for firm size and past growth, as well as industry-year effects. Our findings suggest a positive causal effect of transactional growth, possibly through learning ideas or gaining capabilities or resources from the acquired firms. It could also be firms with certain capabilities expand through transactions, helping the firm succeed.
How can your findings influence leaders to develop overall growth?
A key focus of government policy is on supporting small businesses. In line with other recent work, our results suggest small, young businesses have the greatest scope for positive growth. At the same time, a broad reallocation of resources to younger firms is inadvisable, as young firms that have achieved a large size experience significant negative growth on average.
For managers, the positive link between transactional growth and future performance suggests they may want to consider if acquisitions could be beneficial in their context. Managing and integrating acquisitions is challenging. Any gains often go to the shareholders of the target company as acquirers frequently tend to pay too high a price.
