The dynamics of high-growth firms

– Is high-growth persistent?

Recent research shows that most firms do not grow at all, and that most new jobs originate from a small number of high-growth firms. These firms might carry important policy implications as they generate disproportionally many of the jobs created in any given period, and they have therefore received an increasing amount of attention among policymakers in recent years.

There is, however, a lack of consensus on how high-growth firms ought to be defined. An overview of the most common definitions are provided in a previous report for Growth Analysis, entitled “High growth firms: An in depth analysis of measures and definitions” (Daunfeldt et al., 2011). The findings showed that all definitions are associated with both pros and cons. When high-growth firms were defined as the  10 percent fastest growing firms, the results indicated that firms with only marginal growth rates were included in the definition. The report also questioned the relevance of the so-called Birch-index, as the index largely coincided with definitions based on absolute growth. The OECD-definition of high-growth firms is often used in international comparisons, but was found to exclude 95 percent of all firms and 40 percent of all new jobs created during the period 2005–2008.

Most studies of high-growth firms do not examine what happens to them over time, which we argue is a major limitation. If high-growth firms are persistent over time, then we might learn something from investigating high-growth firms; knowledge that can be used to increase the number of fast-growing firms in the economy. This is, however, not possible if high growth rates are not persistent over time. Very few studies have investigated this issue, although this is essential to our understanding of the importance of HGFs.

The purpose of this report (The dynamics of high-growth firms: Is high-growth persistent?) is to analyze if growth of Swedish firms during the period 1999–2008 are characterized by persistence. The analysis is based on data from Statistics Sweden and includes all private firms in all sectors in Sweden. Number of employees is used as our growth indicator, and a growth regression is estimated to test whether firm growth is correlated over time; where growth over three years is regressed against growth over the preceding three year period. For the purpose to see whether the results differ with respect to firm size and growth, the regression analysis is performed separately for different size- and growth categories. This analysis is then expanded to include transition probabilities showing the probability to transit from one growth category to another.

The results indicate that firm growth in general is negatively correlated over time, which implies that positive growth in one period is followed by a period of negative growth. Furthermore, the results show that the negative correlation is especially strong for  high­growth firms. One interpretation is that high-growth firms in one period are unlikely to experience continuous high growth in the following periods. However, the results from the transition probability analysis show that high-growth firms are more likely than most other firms to experience positive growth, but not as high as before.

To conclude, the focus on  high-growth firms in a certain period of time is problematic because observed high-growth firms will most likely not be high-growth firms in the next (three year) period. It is therefore doubtful whether studies of these firms in merely one point in time could generate insights about how economic policy should be formulated to increase the number of high-growth firms. We believe that future studies also should focus more on what characterizes high-growth firms that show persistent high growth rates over time.

The dynamics of high-growth firms – Is high-growth persistent?

Serial number: Report 2011:15

Reference number: 2011/059

Download the report in Swedish Pdf, 2.2 MB.


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