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Firm size, age, industrial networking, and growth: a case of the Korean manufacturing industry

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Abstract

This paper investigates the roles of firm size, age, and industrial networking in determining firm growth. Analyses using the 2-year panel data of 7,889 Korean manufacturing firms between 1994 and 2003 confirm that firm size and age have significant negative effects on firm growth and significant positive impacts on firm survival. R&D and export activities are found to facilitate both firm growth and survival. The primary focus of this study is to examine the effects of industrial networking, such as subcontracting and clustering, on firm growth. The results show that subcontracting does not yield any positive effect for firm growth, but encumbers survival, which may be accounted for by the high subcontracting intensity among small firms. Clustering, on the other hand, is found to promote firm growth and survival. There is, however, little evidence that such a positive effect of clustering is derived from network externalities through cooperation and competition among firms in a cluster per se.

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Notes

  1. In this paper, establishments, plants, and firms are used interchangeably.

  2. For a review, see Sutton (1997) and Audretsch et al. (2004). There are exceptions against this conventional wisdom. Acs and Audretsch (1990), Audretsch et al. (2004), and Delmar et al. (2003) reported that Gibrat’s law on a firm's size-growth relationship cannot be rejected. Wagner (1992) found no strong evidence that smaller firms tend to grow faster than larger firms. Lotti et al. (2003) suggested that smaller firms are likely to grow faster only in the early stage of their life cycle, while in the subsequent years the Gibrat’s law cannot be rejected. Das (1995) suggested a strong positive effect of firm age on growth in the case of an infant computer hardware industry in India. Heshmati (2001) found a positive firm age-growth relationship in terms of assets and sales, while negative in the employment model of firm growth.

  3. In this paper, clustering, industrial complex, and industrial districts are used interchangeably.

  4. Korea means South Korea, unless otherwise noted.

  5. These big business conglomerates are often called chaebols. Among developed countries, Japan shares similar industrial structure with Korea, in which large firms play a leading role in the economy (Johnson 1982).

  6. For details on Gibrat’s law and follow-up studies, see Sutton (1997) and Caves (1998).

  7. There are more relevant studies using data from European, Asian, and African countries: Dunne and Hughes (1994); Hart and Oulton (1996); Kumar (1985), and Reid (1993) using UK data; Contini and Revelli (1989) for Italian firms; Almus and Nerlinger (2000); Harhoff et al. (1998), and Wagner (1992) using West German data; Mata (1994) for Portuguese manufacturing firms; Weiss (1998) for Austrian firms; Liu et al. (1999) using Taiwan data; Yasuda (2005) for Japan, and finally, McPherson (1996) using data on five countries in Southern Africa.

  8. Jovanovic (1982) proposes the special assumptions under which Gibrat’s law still holds. If the distribution of firm efficiency is lognormal, firm growth is independent of size for firms of the same age. If firm costs are Cobb-Douglas with decreasing returns to scale, firm size is not relevant for age. If firm costs are Cobb-Douglas with decreasing returns to scale, firm size is not relevant for mature firms. However, these assumptions fail to be proved in Evans (1987a).

  9. Geroski et al. (2003), Del Monte and Papagni (2003), and Goddard et al. (2005) have shown results in support of Gibrat’s law. In contrast, Goddard et al. (2002), Chen and Lu (2003), Oliveira and Fortunato (2006) and Aslan (2008) demonstrated that Gibrat’s law does not hold.

  10. For example, Mansfield (1962) finds that the successfully innovating firms grow about twice as rapidly as other comparable firms. The rewards for successful innovation seem to have been substantial for the short-term growth of smaller firms.

  11. Other difficulties in relation to subcontracting transactions include the receipt of irregular and unexpected orders (47.2%) and sudden curtailment of delivery terms (39.2%) (Korea Federation of Small and Medium Business 2007).

  12. In 2004, more than half of subcontracted firms partly or totally re-subcontracted their work to other firms (Korea Federation of Small and Medium Business 2005). The gap between big firms and SMEs in terms of the profit rate and productivity has become wider (ibid.).

  13. The Korean government conceals information of certain firms for the purpose of confidentiality. For example, if a firm is the only one to run the business of a particular industry in an administration district, data on this company are missing. In order to secure as much data as possible, the two-digit industry code is used instead of the five-digit one following the Korea Standard Industrial Classification.

  14. Usually, “exit” of a firm means that the firm fails and disappears during the observation period. However, in this paper, firms in which the number of employees has shrunk below five are also regarded as the exiting firms due to the survey design.

  15. There are alternative ways to measure the extent of firm growth, such as sales or employment of a firm. According to Delmar (1997), 30.9% of the previous studies on firm growth relied on the sales variable, while 29.1% of studies used the number of employees of a firm as the measure of firm growth. However, the employment size is regarded as most reliable in terms of data quality compared to alterative measures (Liu et al. 1999). Using the size of employment as the proxy of firm size, we were able to compare the case of Korean manufacturing firms with other studies on developed countries without facing with the measurement incompatibility across studies (Acs and Audretsch 1990; Evans 1987a, b; Farinos and Moreno 2000; Harhoff et al. 1998; Organization for Economic Cooperation and Development 2002).

  16. The major industry is defined as the industry of the highest concentration ratio within a cluster. The concentration ratio of an industry within a cluster is calculated by dividing the number of employees in a given industry into that of all firms in a given cluster. The variable of “major industry” is used as the indicator for the density of networking among firms in the same industry within a cluster. Industry is classified according to the two-digit Korean Standard Industrial Classification.

  17. Results of Table 1 on differences in characteristics between surviving firms and all firms are all statistically significant at the 5% level by the mean equivalence test.

  18. Details on how to obtain the LQ variable may be derived from Bennet et al. (1999) and Fingleton et al. (2004).

  19. This issue is acknowledged and empirically investigated in many studies related to Gibrat’s law using US and European countries, such as Dunne and Hughes (1994), Hall (1987), Harhoff et al. (1998), Mata (1994), and Weiss (1998).

  20. As it is not easy to directly investigate the relationships among firm size, age, and growth due to their quadratic and interaction coefficients, the percentage of firms of which partial derivatives of the growth function with respect to size and age are positive (or negative) is computed using the estimates of model (4): for 96.3% of all firms, size effects were negative, and for 93.5% of all firms, age effects were negative. This result shows that, in most firms, firm size and age have a negative effect on firm growth, which confirms the result of most previous studies, including Evans (1987a, b).

  21. Insignificance of subcontracting effect on growth is also inconsistent with Song et al. (2004), who suggest that the subcontracting firm is less likely to grow due to excessive price-cut demand from the parent company.

  22. Technically, different data sources and variable definitions may also bring on ambiguity in empirical results. Yasuda’s study (2005) is based on Japanese manufacturing firms with 50 employees or more and subcontracting firms for only one parent company. This paper, on the other hand, deals with Korean firms with five employees or more, and subcontracting is limited to the form that the parent company provides material for subcontractors.

  23. According to a staff member of the Korea Industrial Complex Managing Corporation, positive externalities through industrial networking itself may be weak in the case of the Korean industrial complex. Nevertheless, comparative advantages of clustered firms certainly are derived from well-established infrastructure. He also mentioned that policy supports, mainly tax exemption and subsidy, played a role in firm growth and survival in a cluster (interviewed on 16 February 2006).

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  1. Centre for Institutional Performance, University of Reading, Whiteknights, Reading, RG6 6AA, UK

    Younsuk Park

  2. KDI School of Public Policy and Management, 87 Hoegi-ro, Dongdaemun-gu, Seoul, 130-868, Korea

    Jaeun Shin & Taejong Kim

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Park, Y., Shin, J. & Kim, T. Firm size, age, industrial networking, and growth: a case of the Korean manufacturing industry. Small Bus Econ 35, 153–168 (2010). https://doi.org/10.1007/s11187-009-9177-7

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