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Does Gibrat's Law hold among young,small firms?

According to Gibrat's Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the examined period. Aimed at extending this line of investigation, the present paper uses quantile regression techniques to test whether Gibrat's Law holds for new entrants in a given industry: that is for new small firms in the early stage of their life cycle. The main finding is that for some selected industries in Italian manufacturing Gibrat's Law fails to hold in the years immediately following start-up, when smaller firms have to rush in order to achieve a size large enough to enhance their likelihood of survival. Conversely, in subsequent years the patterns of growth of new smaller firms do not differ significantly from those of larger entrants, and the Law therefore cannot be rejected.JEL Classification: L11, L60Previous versions of this paper were presented at the 27th Annual EARIE Conference (Lausanne, 7-10 September 2000) and at seminars held between 2000 and 2003 at the Economics Department of Harvard University, the Catholic University of Milan, the University of Ferrara, the University of Bologna, the Bank of Italy, and Athens University of Economics & Business. We would like to thank Carlo Bianchi, Giuseppe Colangelo, Giovanni Dosi, Steven Klepper (Editor), Stephen Martin, Ariel Pakes, Aman Ullah and, in particular, Helen Louri and two anonymous referees for their valuable comments on earlier drafts. Financial support from MIUR (Year 2000; protocol #MM13038538_001; project leader: E. Santarelli) is gratefully acknowledged.Correspondence to: E. Santarelly     

Defending Gibrat’s Law as a long-run regularity

According to Gibrat’s Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the period examined. While earlier studies tended to confirm the Law, more recent research generally rejects it. This article reconciles these two streams of literature, taking into account the role of market selection and learning in reshaping a given population of firms through time. Consistently with previous studies, we find that Gibrat’s Law has to be rejected ex ante, since smaller firms tend to grow faster than their larger counterparts. However, a significant convergence toward Gibrat-like behavior can be detected ex post. This finding is an indication that market selection “cleans” the original population of firms, so that the resulting industrial “core” does not depart from a Gibrat-like pattern of growth. From a theoretical point of view, this result is consistent with those models based on passive and active learning, and can be seen as a defense of the validity of the Law in the long-run.

Is demand-pulled innovation equally important in different groups of firms?

Previous empirical literature has tested the demand-pull hypothesisand found that innovation may be driven by output. Using a balancedpanel of 216 Italian manufacturing firms (1995–2000) andchecking for the path-dependent nature of R&D we find arole of sales in inducing R&D. However, the demand-pulleffect plays a varying role for different sub-samples of firms.Exporting firms, liquidity-constrained firms, unsubsidised firmsand those not heading a group seem to be sensitive to salesin deciding R&D. These results have been obtained usinga Least Squares Dummy Variable Corrected Estimator, a recentpanel-data technique suitable for small samples.     

Young firms and innovation: A microeconometric analysis

This paper discusses the sources of product innovation in young innovative companies (YICs), here defined as firms engaged in product innovation and with less than 8 years of activity. In particular, we look at in-house and external R&D and at the acquisition of external technology in its embodied and disembodied components. These input–output relationships are tested on a sample of 2713 innovative Italian firms. A sample-selection approach is applied to study both the determinants of product innovation and the factors affecting the intensity of innovation.Results show that in-house R&D is linked to the propensity to introduce product innovation both in mature firms and YICs; however, innovation intensity in the YICs is mainly dependent on embodied technical change from external sources, while in-house R&D does not play a significant role.     

Book review

This paper examines the causes of market concentration in advertising-supported online markets such as sports, news, and email. In particular, it is the first paper to explore the relationship between concentration and product differentiation, economies of scale, market size, advertising, content costs, and multi-market ownership in online markets. As expected, differentiated large markets with low content costs and little multi-market ownership are less concentrated. Furthermore, I show that advertising-supported online markets have much in common with the magazine industry.     

The birth of new enterprises

This paper deals with the birth of new enterprises both from a theoretical and an empirical point of view. In the first part of the work, the conventional economic wisdom is compared with some alternative approaches leading to multicausal frameworks. The author tests their relative explanatory features in the second part of the paper. Elaborating the results of 720 questionnaires filled by new Italian entrepreneurs, the importance of economic variables as income expectations and barriers to entry in shaping the diffusion of new enterprises is confirmed. On the other hand, personal backgrounds and motivations as well as environment factors turn out to have a crucial role, too.