Book Review

New Perspectives on Firm Growth

Per Davidsson and Johan Wiklund

Edward Elgar, 2013
Cheltenham, UK and Northampton, MA, USA

ISBN 978 0 85793 360 7 –  E-ISBN 978 0 85793 361 4

Book Review (1) by
Catia de Assis Silva das Chagas2
Mariléa da Silva Oliveira2
Roberta da Silva Lopes2
Branca Terra3

 

The book, New Perspectives on Firm Growth, by Per Davidsson and Johan Wiklund, was published in 2013 by the publishing house Edward Elgar of Cheltenham, UK and Northampton, MA, USA.

Co-author Per Davidsson is Director of the Australian Centre for Entrepreneurship Research; and Professor of Entrepreneurship at Queensland University of Technology, Australia, and Jõnkõping International Business School, Sweden. Co-author Johan Wiklund is Professor of Entrepreneurship, Syracuse University, Syracuse, NY, USA, and Jõnkõping International Business School, Sweden. The authors present the Introduction.

The book is divided into four parts: Part I “Explaining why and how Much Firms Grow” (Chapters 1, 2 and 3); Part II “Changing the Firm Growth Research Agena” (Chapters 4, 5 and 6); Part III “A Critical Look at the Growth-Profit Relationship” (Chapters 7 and 8) and Part IV “Theory-driven Research on Specific Forms of Growth” (Chapters 9 and 10).

The first part looks at topics related to the growth of small enterprises, the moderating role of resources and opportunities, and the effect of motivation on the development of small enterprise management. The second addresses measurement factors related to the study of growth and its consequences. The third contains critical analysis of the relationship between growth and profit. In the fourth and final part, the book highlights specifics how assets and behavioural uncertainty shape the growth in sales and employment, as well as organic and acquisitive growth according to the Penrose theory of the Growth of the Firm. The authors present, at the outset, a summary in thirteen figures listed as follows: 1.1 Diagram of the results for the revised model of small business enterprise growth; 2.1 Adapted version of the theory of planned behaviour for studying how growth aspirations influence actual growth; 2.2a Interaction of aspiration and education on growth; 2.2b Interaction of aspiration and experience on growth; 2.2c Interaction of aspiration and dynamism on growth; 2.3 Four types of firms, in terms of resources and opportunities for growth and growth aspirations; 3.1 Cross-lagged panel analysis of growth and growth motivation; 6.1 Alternative foci for studies of small firm growth; 7.1 Categorization schema of firms by growth and profitability; 8.1 An integrated model of growth-profitability dynamics; 8.2 Profitability-growth configurations; 10.1 Model of firm growth; 10.2 Linear and quadratic models of the relationship between previous and current organic growth.

The book gives emphasis to the following collaborators: Leona Achtenhagen, Gaylen N Chandler, Frédéric Delmar, Jason Fitzsimmons, Sourafel Girma, Andy Lockett, Alexander McKelvie, Lucia Naldi, Holger Patzelt, Dean A Shepherd and Paul Steffens.

Chapter 1 – “Building an integrative model of small business growth”, written by Johan Wiklund, Holger Patzelt and Dean A Shepherd”, presents five viewpoints, based on Entrepreneurial Guidance (EG), environmental factors and individual growth characteristics, for the purpose of creating a development model for small enterprises. The viewpoints presented are: 1) Entrepreneurial Guidance (EG) and the growth of small enterprises: EG represents strategic guidance of small enterprises in order to achieve growth; 2) The environment and the growth of small enterprises: the influence of the environment on the growth of small enterprises was studied; 3) Strategic growth and the growth of small enterprises: the performance and effectiveness of EG depends on the characteristics and nature of the external environment in which the small enterprises operate; 4) Growing resources and small enterprises: three distinct theoretical constructs were created in relation to the growth of small enterprises and their resources. These theoretical constructs address the following: strategies focused on processes; the relationship of the theory of human capital and the growth of small enterprises; and the relations between human, financial and business resources; and 5) A growth posture and the growth of small enterprises: the researchers studied the influence of the attitudes of small enterprise management on the growth of those enterprises, which revealed that management attitudes do influence growth.

Chapter 2 – “Aspiring for, and achieving growth: the moderating role of resources and opportunities”, written by Johan Wiklund and Dean A Shepherd”, presents the “Theory of Planned Behavior (TBP)”, from which a model was developed that revealed the importance of behavioural control in the growth of small enterprises.

Chapter 3 – “The effect of small business managers’ growth motivation on firm growth: a longitudinal study”, written by Frédéric De/lmar and Johan Wiklund”, highlights the theory of motivation, based on the premise that motivation affects people’s behaviour, which, in turn, influences business growth. Moreover, the temporal stability of the motivation and the positive or negative effect of previous behaviour influences the suitable modelling of the relationship between motivation and behaviour, so that the choice to expand the business, the willingness to sustain that choice over time, and the amount of effort expended are all reflected in the growth of small businesses.

Chapter 4 – “Are we comparing apples with apples or apples with oranges? Appropriateness of knowledge accum-ulation across growth Studies”, written by Dean A Shepherd and Johan Wiklund”, addresses the empirical study of company growth, using measurement theory and the scientific understanding of philosophical perspectives, with the aim of investigating the appropriation of accumulated knowledge relating to the growth of new businesses. Based on studies by Weinzimmer, Nystrom, and Freeman (1998) and a review of the literature using studies published between 1992 and 2006, the authors sought correlation between the different growth indicators (sales, employee numbers, profit, assets and shareholders’ equity) and the different formulas for measuring that growth (absolute, relative or linear regression). The aim was to identify the kind of measurement decisions made empirically in the growth studies and determine the variability of the choices for measuring the growth of firms. After reviewing the literature, the authors classified the measurement decisions according to the use of the growth indicator, its calculation formula, and the period of time used to study it.
To investigate the appropriation of knowledge accumulated through the studies, the authors analyzed Swedish companies with registered patents that had been around for a minimum of six years (1994 to 1998). The results point to new perspectives regarding the continual growth of organizations.

Chapter 6 – “Towards an integrative framework for future research on small firm growth”, written by Per Davidsson, Leona Achtenhagen and Lucia Naldi”, focuses on research into the growth of small enterprises using an integrated framework, wherein the authors present a list of the historical antecedents, showing the amount of growth, forms of growth and processes of growth, as well as their effects, and proposing future research into the growth of small firms. The authors also present some suggestions relating to the study of growth of small firms: using more homogeneous samples and panel study of entrepreneurial dynamics. A significant factor highlighted by the authors is that theorizing and empirical research are not only found in small firms.

Chapter 7 – “Growing profitable or growing from profits: putting the horse in front of the cart?”, written by Per Davidsson, Paul Steffens and Jason Fitzsimmons”, discusses studies on growth-versus-profitability, using Resource-Based View (RBV) mechanisms. The authors offer an illustration of growth and profitability, using a simple 2×2 matrix. Firms are positioned according to whether they are above or below the industry average for each criterion. The authors show four cases, denominates: star (high in both), profit (high profitability/low growth), growth (high growth/low profitability) and poor (low in both). In the studies of growth and profitability, the authors develop two hypotheses. The first – H1 – states that firms with high profitability and low growth are more likely to achieve high growth and high profitability in subsequent periods than firms with a high level of growth and low profitability. The second – H2 – states that firms with high growth and low profitability are more likely to attain a low level of growth and low profitability in subsequent periods than companies with high profitability and low growth. During the data collection, the authors used two sets of longitudinal data from small and medium-sized enterprises located in Sweden and Australia. As a measure of profitability, the authors considered Return on Assets (ROA). The survey was concerned about the growth and profitability performance of businesses over time. The results show that “profitability was foremost” rather than “growth being in first place”.

Chapter 8 – “Performance configurations over time: implications for growth- and profit-oriented strategies”, written by Paul Steffens, Per Davidsson and Jason Fitzsimmons”, addresses certain issues regarding research and entrepreneurial practice, in contrast to company growth and the study of profitability against company growth. The authors observe that newer companies tend to be stronger in “discovery capacity”, while older companies tend to have better “exploitation capacity”. The chapter explains that “discovery capacity” is the ability of key decision makers to come up with and/or recognize innovative ideas and quickly bring them to market, at low development cost. Whereas “exploitation capacity” refers to the ability to realize the full potential of the ideas that are developed. The authors mention that several theoretical viewpoints provide information about the evolution of growth and profitability as a result of the age of the firm. The chapter offers an integrated model of the dynamics of growth and profitability as the firm ages, incorporating the following elements: a) the core performance variables (growth and profitability); b) the focal “moderator” (company age); and c) the main characteristics of the firm that can vary with age (resource stocks, flexibility, exploitation capacity, and discovery capacity). Another aspect that the chapter addresses is profitability versus sales growth. From the age of the firm, using a growth-profitability model, the authors investigate the strategic behaviour and development of the business (over 3-5 years). Certain hypotheses were developed, using a profitability-growth configuration, and in order to demonstrate those hypotheses, considering only firms with fewer than two hundred employees, the authors collected data from the Business Longitudinal Survey (BLS), carried out by the Australian Bureau of Statistics (ABS) during the period 1995 to 1998. The performance measure considered was sales growth, with ROA as the assessment of profitability. In the analysis of the hypotheses, the authors highlighted hypothesis 1 – the configuration of high profitability and growth among a greater number of newer firms. Under this hypothesis it was observed that newer firms are more likely to achieve a high profitability and growth configuration than older companies. Due to the shorter time of their existence, newer firms are unlikely to have faced as many external shocks that would jeopardize their performance. The authors ended this chapter by emphasizing that successful organizations will attain high performance in sales growth and profitability.

Chapter 9 – “Asset specificity and behavioural  uncertainty as moderators of the sales growth-employment growth relationship in emerging ventures”, written by Gaylen N Chandler, Alexander McKelvie and Per Davidsson, analyzes the growth of emerging enterprises. The purpose is not to predict the growth of the business, but rather whether employees are added in support of the sales growth or the sales growth is supported by outsourcing. The authors consider the transaction cost savings, noting that it explains the relationship between sales growth and employment. The research performed by the authors focused on two aspects of transaction cost savings: asset specificity and behavioural uncertainty. The authors point out that, with asset specificity, firms can support sales growth by hiring additional employees, outsourcing or using technology that requires fewer employees. Meanwhile, with behavioral uncertainty, there are related difficulties in guaranteeing the performance of employees or outside partners. The authors conclude this chapter by emphasizing that sales and employment go hand in hand, whenever the specificity of human assets is high and the cost of uncertainty is lower than the cost of outsourcing.

Chapter 10 – “Organic and acquisitive growth: re-examining, testing and extending Penrose’s growth theory”, written by Andy Lockett, Johan Wiklund, Per Davidsson and Sourafel Girma, points out that Penrose’s growth theory is a significant contribution to the field of management and that the core features of the theory are the Adjustment Cost (AC) and the Productive Opportunity Set (POS). The authors emphasize that the AC consists of the time and effort required to integrate new personnel into the company, rather than direct acquisition costs. Meanwhile, the POS is determined by the way in which the management is able to arrange the resources at their disposal to generate productive services. An investigation is conducted to verify the impact of the AC and POS as a function of a strategy of internal Organic Growth (OG) or of external Aquisitive Growth (AG). The tests considered the data of both newer and older companies. The purpose was to investigate whether relative OG and AG varies according to the size and age of the firm. For data collection, the authors used a sample of all the commercially active companies located in Sweden, with the exception of government-owned institutions. The adopted criteria were companies with more than twenty employees and a data collection period of ten years (1987 to 1996). In the results analysis, the authors applied tests to investigate whether the relative OG and AG varied according to the size and age of the company. The authors point to two major findings. The first was that the OG in the previous period had a detrimental effect on current growth. The second suggests that the AG of the previous period had a positive effect on organic growth in the current period. The authors concluded this chapter by emphasizing that the Penrose growth theory is comprehensive, but there has been little work that has studied the subject and tested the theory. Specific contributions to the Penrose growth theory were presented as suggestions in the study.

In the Acknowledgements, the authors extend their thanks to Deniz Ucbasaran, Mike Wright, and Erik Stam for their helpful comments and suggestions.

The authors also present Bibliographical References and a list of key terms.

1. Final work in the Innovation Accounting Course, in the Accountancy Postgraduate Program (PPGCC), leading to a Master’s degree from the School of Administration and Finance (FAF) at the State University of Rio de Janeiro (UERJ).
2. Catia de Assis Silva das Chagas, Mariléa da Silva Oliveira, and Roberta da Silva Lopes are accountants and Master’s Degree Students in the Accountancy Post-graduate Program in Accounting Sciences fromat the Rio de Janeiro State University.
3. Branca Terra is Professor of the Master’s Program in Accountancy at theing Sciences from Rio de Janeiro State University.