The determinants of firms survival and growth

I. Introduction

This paper will review several literatures on the determinants of young small firms survival and growth. The relation of survival and growth is quite complex not only because survival is the necessary condition of growth, but also the survival rate shows an influence on the rate of further growth (Cressy, 2006). However, the factors that influence the probability of survival may not indicate the further growth rate (Mengistae, 2006). A firm which can survive could choose various patterns to grow and the entrepreneur may decide to stay at present place or slow down the pace of growth (Brush et al., 2009). Hence, the determinants of firms survival and growth in this article refer to the factors contributing to firms duration and longevity. This article divides factors into three aspects which are industry-based factors, firm-based factors and entrepreneur-based factors. The three categories are formulated with the paper of Baptista and Karaoz (2006) as a reference. Yet, factors under each catalog are slightly different with many other opinions which I consider to be relevant.

II. Definition of survival and growth Considerable literatures have showed that smaller and younger firms are more likely to fail because of factors such as start-up size, entrepreneurs experience and capability (Van Praag, 2003; Park et al. 2010). Cressy(1996) found 45% business establishments failed at the first 2.5 years and 80% ceased trade at the first 6 years. In the study of Saridakis et al. (2008), it is showed that the rate of surviving more than one year is 75% and that of more than 4 years is 55% for small firms in England. Firms which fail to survive may exit the industry either voluntarily or involuntarily. For those voluntary exits, it may happen when firms are merged or sold by their founders or owners. Those involuntary exits usually result from bankruptcy or

incapability of repaying the debt (Cressy, 2006). Although there are a number of literatures studying on the factors of young small firms closure, this article will focus on determinants of young small firms survival and growth. Generally speaking, when we say the growth of a firm, we usually mean the growth of the cash flow profits. Yet, few people would imply the change of profits as an approach to measure firms growth while quite a lot of studies utilize other viables such as increasing assets, geographic expansion and new market exploitation(Brush et al., 2009). Cressy (2006) assumes the reason for that is the unreliability of the profits data that small firms provided. When collecting data of profits, many cases show that small business tend to have two account books, one of which serves to conceal the real sale and minimize the profit in order to avoid VAT. This heavily influences the reliability of growth measurement. Therefore, the term of growth here will be generally considered as the proportionate increase in several factor based on firms, such as assets, employment and sales per year.

III. Industrial-based Factors In the industrial level, or environmental level, three factors could influence firms survival and growth which are competition, market concentration, and rate of industrial growth (Audretsch and Mahmood 1995; Mengistae, 2006). Mengistae (2006) stated that the more competitive the industry becomes the lower probability of survival and rate of growth is. An industry with less competition could result from either quite low price-cost margin which few would be interested in it or with high barrier to entry that small firms with limited start-up resources are not capable to compete in the area. However, the high barriers decrease the rate of exit because of low rate of entry, therefore probability of survival and further growth rate is estimated as higher than that in a more competitive environment. On the contrary, industries which have high rate of entry and exit usually indicate low probability of survival while small firms in these areas might grow significantly in a short time. Market concentration is a controversial factor in whether it is a positive

determinant or negative. Audretsch and Mahmoon (1994) found market concentration had a negative effect on firms survival and growth while Mata and Portual (2002) state there an positive influence of concentration on firms duration. One opinion believes that highly concentrated market could result in retaliation of uniting existing large companies to new entering competitors. The other hold an idea that while the situation of highly concentration serves to increase incumbent retaliation thereby decreases the rate of survival, these small firms may not lead to a united movement of the entire incumbent (Gelman and Salop, 1983). In Baptista and Karaoz (2006) research, they tested their hypotheses through exploring the SISED database and concluded that market concentration contributes to the probability of firms survival significantly therefore negating the prior assumption that highly concentrated market may leads to existing firms unite together to retaliate new entrants (Bunch and Smiley, 1992). Higher rates of growth in the industry may indicate higher probability of survival and growth (Mata and Portual, 2002). High industrial growth makes the whole market easier to survive, especially for new firms with small size in a way that small firms do not need to steal market share from existing large competitors. However, one thing should be noticed that industries with high growth rates is usually in the stage of early development which means more turbulence is also involved with high rates of entry and exit (Agarwal and Gort, 1996). Hence, high rates of industrial growth could be double-edged with both opportunities and risks.

IV. Firm-based Factors On firm-based level, I conclude three factors promoting firms longevity, which are initial size, strategy and capital resoure. Here the term of size I refer to the initial size when a founder starts to run a business. Several literature support that the start-up size has a positive effect on small firms survival and further growth, such as Saridakis et al. (2008) and Bonaccorsi and Giannangeli (2010). The start-up size is considered to associate with organizational

capital (Black and Lynch, 2005). Organizational capital depends on accumulative competences of individuals in the firm. It could be a collective force and also separate. Firms growth cannot only rely on the founders individual effort, but also need other members supports to the whole process of business therefore organizational capital is necessary. According to that, start-up size is influential in promoting growth. Another factor is the firms strategy. I found two different approaches to the influence of firms strategy. One is competing on price signal a short time survival of firms. Saridakis et al. (2008) found in their research that firms which focus on competing on price are less likely to survive for long than those state their core competencies to be elements other than price. Small firms have limited cash flow to operate the whole trade and price competition let them allocate majority capital on promotion and market scale, meaning little cash for customer service and R&D. Such strategy may lead to short-term sale growth but hinder or devastate long-term development especially for small firms with limited free cash. Some other literatures suggest that firms in combination strategy achieve greater performance and more growth than those in pure strategy such as cost-efficiency or differentiation strategy. Leitner and Guldenberg (2010) explain that it is because technology and modern management practices allow firms dynamically change cost and price and differentiate their products according to constantly changing market. Thanks to the adjustment, small firms can reduce market risks and maximize price-cost margin. The third factor is financial supports which are in favor of firms duration significantly in the early stage. Honjo (2000) found a significant effect of capital resources on firms survival and the financial constraints at the early stage of firms could affect negtively in later duration and growth. In the research of Saridakis et al. (2008), it is found that financial constraints in the first year of firms could greatly hinder firm survival and growth. Bank in this determinant play a key role in financing young small firms. Some literatures suggest that it is because banks only finance firms promising and more likely to survive while another explanation is firms which are

more likely to survive and grow better thanks to banks financial supports. No matter which explanation is more convincing, it is clear that the issues of firms duration and capital support are intimately related.

V. Entrepreneurial-based factors Entrepreneurial-level determinants generally focus on entrepreneurial human capital. For young and small business, the executive is usually the founder or owner so the founders influence on firms survival and longevity is significant because it closely links to human capital and organizational capital. There are two important aspects that scholars emphasize which is transferable human capital (i.e. owners schooling) and entrepreneurial ability (i.e. business experience) (Cressy, 1996; Astebro and Bernhardt, 2003). Mengistae (2006) comes out that business owners age, education and previous work experience has no relation with firms growth. Moreover, owners entrepreneurial competency is a trigger factor only when it associates with large startup size because it allows entrepreneurial ability transfer into organizational capital. This could be explained that veteran with years previous business experience would be more easier to access to more venture capital and attract more financial supports. However, some literature do support on the positive effect of owners education such as Bruderl et al. (1992), and Saridakis et al. (2008). In Mengistae (2006)s paper, it is quite interesting that he supports both of the factors. He found both of owners schooling and business experience have a positive effect on rates of survival and the average growth rates. The research results of Baptista and Karaoz (2006) are quite reasonable in explaining this issue. They found out for firms owner, who has been employed or owned a business prior to the new venture, all entrepreneurial human capital variables (age, education, employment experience and industry-specific experience) positively influence business probability of survival and duration. For owners who neither have employment experience nor business ownership, only industry-specific experience

shows a supportive signal on firms growth.

VI. Conclusion This article is basically a review of various literatures related to determinants of firms survival and growth, more specifically firms duration and longevity. Based on the frame of Baptista and Karaoz (2006), I gather factors from a number of scholars opinions that I believe greatly affect young and small firms duration. Detailed, the three categories are as following: Industrial-based factors: competition, market concentration, and rate of industrial growth. Firm-based factors: initial size, strategy and capital resource. Entrepreneurial-based factors: entrepreneurial human capital variables and entrepreneurial background. The first factor is from external environment and influences firms in a way that can be hardly changed. The second factor generally depends on the last one. Hence, I believe entrepreneurial factor is the key for a small business to survive longer and grow faster. The limitation of this article is the generality. The results of all the literatures I review are based on different geographical areas and economic environment which is quite possible to interfere with the results of these researches. Without a specific industry and environment as a study object, all these determinants may become too general to be explained as a significant factor on firms survival and growth.

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