Scaling laws and a general theory for the growth of public companies

TL;DR

This paper develops a scaling theory for the growth of public companies, revealing universal patterns and differences in growth dynamics across US and Chinese markets based on extensive data analysis.

Contribution

It introduces a novel scaling framework that explains company growth patterns and predicts their long-term trajectories, supported by empirical data from US and Chinese firms.

Findings

Sales scale sublinearly with assets in both countries.

Assets grow as a power law over time, not exponentially.

Liabilities scale linearly in the US and superlinearly in China.

Abstract

Publicly traded companies are fundamental units of contemporary economies and markets and are important mechanisms through which humans interact with their environments. Understanding the general properties that underlie the processes of their growth has long been of interest, yet fundamental debates about the effects of firm size on growth have persisted. Here we develop a scaling framework that focuses on company size as the critical feature determining a variety of tradeoffs, and use this to reveal novel systematic behavior across the diversity of publicly-traded companies. Using a large database of 31,553 US companies over nearly 70 years, and 3,160 Chinese companies over 24 year, we show how the dynamics of companies expressed as scaling relationships leads to a quantitative, analytic theory for their growth. This theory produces several predictions that are in good agreement with data for both the US and China, whose markets have strikingly different histories and underlying structures. In both cases sales scale sublinearly with assets and exhibit nearly identical exponents leading, surprisingly and nontrivially, to assets that grow as a power law in time rather than exponentially, as often assumed. On the other hand, liabilities scale linearly in the US (exponent of $1.0$) but superlinearly in China (exponent of $1.09$). We show that such small differences in scaling exponents can have a significant impact on the character and long-term evolution of growth trajectories. These results illustrate that while companies are part of a larger class of growth phenomena driven by incomes and costs that scale with size, they are unique in that they grow following a temporal power-function which sets them apart from organisms, cities, nations, and markets, whose growth over time is often exponential.