On size and growth of business firms

TL;DR

This paper investigates the size and growth patterns of firms and products, revealing power-law relationships and proposing a proportional growth model that explains empirical distributions across economic systems.

Contribution

It introduces a simple, general proportional growth model that captures the observed size and growth distributions of firms and products.

Findings

Power-law relationship between size and growth rate variance

Model accurately reproduces empirical size and growth distributions

Findings are stable across different aggregation levels

Abstract

We study size and growth distributions of products and business firms in the context of a given industry. Firm size growth is analyzed in terms of two basic mechanisms, i.e. the increase of the number of new elementary business units and their size growth. We find a power-law relationship between size and the variance of growth rates for both firms and products, with an exponent between -0.17 and -0.15, with a remarkable stability upon aggregation. We then introduce a simple and general model of proportional growth for both the number of firm independent constituent units and their size, which conveys a good representation of the empirical evidences. This general and plausible generative process can account for the observed scaling in a wide variety of economic and industrial systems. Our findings contribute to shed light on the mechanisms that sustain economic growth in terms of the relationships between the size of economic entities and the number and size distribution of their elementary components.