How Do U.S. Firms Grow? New Evidence from a Growth Decomposition

Authors: 
Natarajan Balasubramanian, Syracuse University
Ravi Dharwadkar, Syracuse University,
Charlotte Ren, University of Pennsylvania
Jagadeesh Sivadasan, University of Michigan


Journal:
Strategic Management Journal (Forthcoming)

Summary:
How firms grow matters not only because different modes of growth such as acquisitions and organic growth vary in their relative importance but also because they are differently associated with competition and subsequent firm performance.

Research Questions:
1. How important are the various growth modes? 
2. Do they vary across growing and shrinking firms? 
3. How do they vary by firm size and age?  
4. How are growth modes correlated within the firm? 
5. How do firm growth modes change in the face of increased competition? 
6. How are the various modes of growth associated with subsequent firm performance?

What We Know:
Understanding how firms grow is relevant to scholars, managers and policymakers alike. We know that firms grow in many ways such as by opening new units, expanding existing units, and acquiring units from other firms. They also contract in different ways such as by closing or selling units. However, we do not know the relative importance of these various modes. Nor do we know how they are correlated with competition and subsequent firm performance. Without these basic empirical facts, theories of the growth of the firm remain incomplete.

Novel Findings:
(a) Organic modes of growth account for about 70% of gross growth, while transactional modes (acquisitions) account for about 30% of gross growth. 
(b) In the cross-section, among large firms, young firms have lower growth and greater closures and selloffs than old firms; among small firms, old firms have lower growth but lower closures and more acquisitions than young firms.
(c) Most of the trade competition induced decline in manufacturing after 2001 is accounted for by decline in growth from old units and acquisitions, and from increased closures and selloffs, rather than by a decline in growth from new units.
(d) Growth from acquisitions is positively associated with future growth and survival, more so in capital-intensive industries. Organic growth is negatively associated with future survival, but less so in R&D-intensive industries.

Full Citation:
Sivadasan J., Balasubramanian N., Dharwadkar, R. and Ren, C. How do Firms Grow in the U.S.? Evidence using a Novel Decomposition and Implications for Strategy Research. Forthcoming at the Strategic Management Journal

Abstract:
Managers have many ways to grow a firm, but studies typically emphasize transactional modes such as acquisitions and selloffs. Using data on all U.S. firms over 2004–2013, we study seven growth modes in an integrated and comprehensive model. We find that organic modes contribute more to growth than transactional modes, that young, large firms grow less relative to old, large firms, that when firms grow (or shrink), they tend to grow (or shrink) using multiple modes simultaneously and that growth modes vary in their association with competition. Importantly, transactional growth positively correlates with future survival, unlike organic growth. Together, these findings not only suggest that growth modes vary in their contribution to firm growth but also that they may differently influence subsequent performance.