Small firm growth theory and models: a review

Topic - This paper looks at the theory of firm growth. In particular, it attempts to identify models and determinants of firm growth which are relevant to small enterprises. Research Questions - The following questions are addressed in the paper: (i) How is firm growth viewed in the literature? (ii) What are the models of firm growth most relevant to small enterprises (iii) What are the determinants of small firm growth? Methodology - The paper surveys the literature about firm growth with a focus on small firms. It discusses evidence from empirical studies to shed lights on the determinants of small firm growth. Findings - The review indicates that there has been a complete absence of a discussion of an appropriate measure of firm growth in the literature. Theorists have used different measures of growth ranging from employment to profits, value-added, turnover, and total assets. Most studies have been uni-dimensional, looking at individual indicators only. Three models of firm growth are identified to be most relevant to small enterprises. They include stochastic model, human capital model and learning model. Apart from firm size and firm age, which are commonly viewed as the determinants of growth, small firm growth is influenced by industry, location, gender, and human capital of the owner. Other important macro variables that have a direct effect on firm growth are the aggregate level of economic activity, policy, and constraints. Implications - The paper shows the complexity of the issue of firm growth. When it comes to studying small firm growth, it is important to pay attention to the multi-dimensional nature of growth. Thus, it is useful to combine or modify existing models and theories of firm growth in studies about small firm growth.