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The Economics of Entrepreneurship: Entrepreneurship and growth
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Abstract
Once a venture has obtained finance and made the transition to start-up, what determines whether it grows and survives, or stagnates and exits? These issues are examined in the present chapter and in chapter 14. There is evidently more to successful entrepreneurship than simply deciding whether or not to start a new firm. Many entrants create little value and do not last long, while others grow to a considerable size and end up creating substantial wealth. Clearly growth plays a central role in any discussion of value-creating entrepreneurship. For their part, policy-makers appear to be moving away from wholesale efforts to encourage new entrants, in favour of promoting a business climate where growth-orientated businesses can more easily create jobs and wealth for the economy. Most firms start small, so to achieve these laudable goals they have to grow. It is interesting in this respect that a well-known theory of venture growth, Gibrat's Law, effectively rules out any role for activist public policies. Gibrat's Law states that growth rates are unrelated to venture size and age, and are effectively random. In fact, the evidence reviewed below suggests that while Gibrat's Law approximates growth patterns for large firms, it does not do so for small ventures, which tend to grow at a faster rate. After outlining Gibrat's Law (and some extensions), several theories of entrepreneurial growth are discussed. The second section of this chapter reviews evidence relating to these theories and identifies the salient empirical determinants of venture growth.