Conditions for Firms’ Growth

No.271
August 2006
Research AssociateYukiko Saito

1. What are the mechanisms that work to bring about firms’ growth? What kind of growth processes do successful firms go through? To answer these questions, a database of medium and small firms (approximately 500,000 firms per year) was employed to analyze fluctuations in firms’ scales (total assets). The distinguishing characteristic of this research, which has been generally overlooked in existing research, is the focus on the “historical effect” on firms’ growth, or the dependence on past performance i.e. how past growth affects future growth. The following points were confirmed by the results of this analysis.
   
   　　・The “historical effect” is directly connected with firms’ growth.
   
   　　・In many firms, the probability for future growth increases if there is growth in 　　　　the previous period; moreover, the longer the history of growth the stronger the “historical effect” and the more likely the firm is to grow in the future.
   
   　　・Conversely, for small-scale firms the probability for additional or sustained growth in the future decreases if there is growth in the previous period.
   
2. These results show that the “historical effect” of a firm’s growth is not brought about by cost adjustments done internally; rather, an external element such as “reputation” is more likely to be the primary factor. Operating under the premise that a firm’s “historical effect” is indeed a product of “reputation”, external relations with financial institutions or other firms become critical. Firms that fall under the scale threshold (total assets below approximately \100 million) have generally not established these relations. Therefore, it can be concluded that public aid aimed at assisting small and medium firms, whose total assets are under \100 million, develop external relations with financial institutions or other firms would be effective.

More Informations

• Japanese
• Full text is not available in English for this report.
  The original Japanese full text is PDF here [518 KB].
  Please let us know the serial number of this report (271) to submit a request for translation.