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The Growth of SMES in a Small Economy

The Growth of SMES in a Small Economy. Adreene Staines Doctoral Student Lancaster University, UK November 4, 2004 ISISA, Islands of the World VIII Kinmen Island. FIRM GROWTH IN SMALL STATES. The Antecedents. Firm growth is independent of firm size Law of proportionate effect

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The Growth of SMES in a Small Economy

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  1. The Growth of SMES in a Small Economy Adreene Staines Doctoral Student Lancaster University, UK November 4, 2004 ISISA, Islands of the World VIII Kinmen Island

  2. FIRM GROWTH IN SMALL STATES The Antecedents • Firm growth is independent of firm size • Law of proportionate effect • Firm growth is inversely related to firm size • Minimum efficient scale • Firm growth is positively related to firm size • Market concentration • Firm growth is inversely related to firm age • Jovanovic (1982) learning model

  3. FIRM GROWTH IN SMALL STATES Limitations of Existing Theories on Firm Growth • Size of firms • Strong bias towards large entities • The Size Assumption • Firm size is the main determinant of firm growth • Origins in large developed economies • Ignores specific characteristics of developing economies

  4. FIRM GROWTH IN SMALL STATES The Case of a Small Developing Economy • Prevalence of small firms • Constraints to small firm survival and growth • Sector specialisation • Limited industrial policy choices • Developing country traits • Undeveloped capital markets, high input costs • Openness to trade • High export and import levels

  5. FIRM GROWTH IN SMALL STATES Key Hypotheses • If the observed negative relationship between firm size and firm growth is independent of domestic market size, Jamaican small firms will exhibit higher growth rates than their larger counterparts. • The sector in which a firm operates in a small economy is expected to influence its growth rate. • Exporting is expected to influence the firm growth process.

  6. Classification of Data Sample 1997 Sales Levels #of FirmsMean SizeStd. Deviation All firms:60 2596.95 4725.64 By sector: Manufacturing 28 2360.53 4194.44 Financial Services 17 2180.32 2653.08 Other 15 3510.45 7135.90 By Export Status: Exporters 31 2891.24 4749.15 Non-exporters 29 2282.36 4763.64 Sales Size Class Small (< J$160Mn) 20 112.76 131.79 Medium (J$161 – 900Mn)20746.09483.82 Large (>J$901Mn) 206931.996261.84

  7. FIRM GROWTH IN SMALL STATES Firm Growth Models • Basic Growth Model • Firm Growth = F(Firm Size, Firm Age) • Expanded Growth Model • Firm Growth = F(Firm Size, Firm Age, X) • Where X represents certain institutional and structural variables that are expected to influence the firm growth process in small developing economies.

  8. Variables • Dependent Variable • Average annual logarithmic growth rate of CPI deflated sales for period 1997 - 2002 • Explanatory variables • Firm Size (log CPI deflated sales for 1997) • Firm Age (year of establishment to 1997) • Size Class (size class of firm based on employment #) • Export status • Export sales (income from exports) • Type of ownership • Sector classification • Location • Information technology communication usage

  9. Econometric Results for Sales Growth over Period 1997 - 2002 Basic Extended Final Size - 0.007 (.026) -0.028 (.032) Age **-0.136 (.053) -0.089 (.063) Export-0.001 (.051) Expsales 0.025 (.032) Web 0.029 (.042) Local-0.058 (.049) Location 0.035 (.049) Finserv 0.062 (.052) ***0.097 (.035) Manu -0.020 (.050) Small0.136 (.178) ***0.325 (.124) Large 0.048 (.051) * Significance at 10% level ** Significance at 5% level *** Significance at 1% level Standard errors are in parentheses.

  10. FIRM GROWTH IN SMALL STATES Small and Medium Sized Firms Only CoefficientStandard Error Size- 0.046*** (.014) Location.118*** (.057) Finserv.141*** (.048) R2.303

  11. FIRM GROWTH IN SMALL STATES Concluding Comments • Firm size in general does not influence firm growth • Firm sector classification matters • Financial services is associated with positive growth • Manufacturing is associated with negative growth • Size (measured by employment numbers) matters. • Firms with less than 10 employees experience high growth

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