Size and Growth of Firms

Abstract

It is often inferred that large firms are the growth firms, and that the economy’s overall performance could be accelerated if companies were made larger. The following will show that such reasoning is either plain wrong or confuses cause and effect. Large firms may be those which have grown most in the past. Alternatively they may be the oldest and have achieved their present size by very slow growth over the years. Even if size and growth are linked, causation may not be evident. Large size may cause fast growth, or fast growth large size. Equally plausible is the existence of some third factor which provides the true explanations. Both of the variables may be related to this key factor, and thus any link between growth and size may be spurious in terms of indicating the economic forces explaining growth.