International Big Business, 1957–77: A Sequel on the Relationship between Size and Growth

Abstract

The hypothesis that the percentage growth rates of firms over a certain period of time are independent of their initial sizes — the Law of Proportionate Effect, alias Gibrat's Law — has attracted the attention and stimulated the efforts of a great number of economists. This is due to several striking implications of the Law. Firstly, “if such a law of proportionate growth held without any restriction the consequence would be a continual increase in the dispersion of the sizes, that is to say, the concentration of industry would increase over time” (Hart and Prais, 1956, p. 171). Secondly, “if the law was confirmed … it would suggest that there was no optimum size of firm from the point of view of growth since all sizes of firm were equally likely to benefit from growth” (Pickering, 1974, p. 116). Thirdly, “it would be very difficult to adopt a deterministic explanation of the growth of firms” (Pickering, 1974, pp. 116–7), since according to the Law, growth is a purely stochastic phenomenon that arises from the cumulative effect of the random operation of a large number of factors acting independently of each other. Lastly, “there will be no continuity in the growth pattern of firms” (Eatwell, 1971, p. 402). This means that the growth rate of a firm in a certain period has no influence on the growth rate in subsequent periods.

Citation

Droucopoulos, V. (1982), "International Big Business, 1957–77: A Sequel on the Relationship between Size and Growth", Journal of Economic Studies, Vol. 9 No. 3, pp. 3-19. https://doi.org/10.1108/eb002542