9

MODELING THE SIZE AND GROWTH RATE DISTRIBUTIONS OF FIRMS

9.1 INTRODUCTION

Firm growth/decline is an important consideration when discussing the dynamic behavior of an industry or even the aggregate economy. Whether one focuses on business capital formation or sales or net private-sector hirings, the determinants of firm growth are a key element in economic policy discussions, especially those pertaining to industrial concentration. Moreover, from a firm's viewpoint, the economic climate in which it operates will obviously impact its ability to prosper and grow; for example, issues pertaining to:

  1. Uncertainty concerning how markets react to changes in technology
  2. The intensity of competitive pressures in a dynamic market
  3. Short-run adaptations to a changing and, at times, turbulent environment
  4. Assessing and taking advantage of growth opportunities
  5. Exercising its competitive advantages to the fullest extent possible

are a constant source of concern and managerial introspection.

9.2 MEASURING FIRM SIZE AND GROWTH

By far the most popular measure of firm size is “employment,” although alternative measures of size such as “total sales” and “assets” have been used. Employment is attractive because it circumvents measurement problems connected with accounting for intangible assets, input price issues, and possible foreign currency adjustments.

As explained in Chapter 2, growth rates describe relative changes in the magnitude of a variable. So if the size (taken as employment level Y

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