Contribution by Serban Mogos, PhD Candidate at Carnegie Mellon University and Co-founder and President of Akcees
Studying high growth firms (HGFs) is the latest gold rush in applied entrepreneurship research. Entrepreneurship policy targets economic growth, and HGFs over-deliver. HGFs have been found to disproportionately account for net job creation (>50%), even though they represent a small fraction of the active firms (<5%), a result proven in a variety of countries and settings (Henrekson & Johansson, 2010). In light of this finding, researchers and policy makers are looking to answer an overarching question: “How do we create (more) HGFs?”.
However, there are still key challenges to overcome at a foundational level, before we can claim valuable insights. An immediate one that surfaces when looking at studies and research papers is the inconsistency in defining high growth firms:
* Definitions vary greatly in terms of indicator (revenues, employees, profit, productivity, assets, etc.), measurement value (absolute, percentage, logarithmic, index), or time period
* Consequently (at least partially due to different definitions), the findings on HGF characteristics fail to agree in terms of distributions over age, size, industry and location
* The OECD definition (>20% annualized growth over a 3-year period, at least 10 employees at the start), which has been adopted as standard, is highly restrictive in economies where the distribution of firms is skewed towards the smallest
* For example, in cases like Sweden or Romania, almost 80% of active firms and selected HGFs are less than 10 employees. The definition has been further adapted to be applicable. (Daunfeldt et al., 2013; Mogos et al., 2015)
There is little agreement on the definition of high growth firms, leading to a natural question: “Are all high growth firms the same, indifferent of indicators and measure?”. There are few studies that directly address this question, yet they overwhelmingly show there are consistent differences and low overlap between measures. This leads to low knowledge accumulation across studies and limited usefulness in informing policy. (Delmar, 2006; Shepherd & Wiklund, 2009; Daunfeldt et al., 2013)
Addressing these concerns while building our knowledge of high growth firms will help establish a healthier relationship between research and practice. We believe that not all growth is the same, and the growth that both entrepreneurs and governments should be most concerned with is sustainable growth. Sustainability refers to the ability to maintain a high growth rate for multiple consecutive years, and to show high endurance in the face of external threats. To operationalize the concept of sustainable growth, we propose three measures:
* Persistence - A measure of continuity and predictability of positive growth. High growth firms should persist in their growth rates over longer periods of time, and have lower variation from positive to negative change. We are hoping for firms that have a high degree of consistency, and not just a one-time (non-repeatable) growth event.
* Volatility - A measure of uncertainty and risk. Volatility represents the variation in growth rates, in direct relation with the impossibility to forecast future performance. An unstable business is more risky and with higher probability of closure. Low volatility is preferable for sustainable high-growth firms.
* Survival - A measure of market fitness. Unsuitable firms will be pushed out of the market. High growth firms should have higher survival rates than average, because growth can be seen as an indicator of identifying and solving an existing need.
While our results are still preliminary, and based on data from Romanian firms between 2000-2012, we observe significant differences in the performance of various definitions of high growth firms. We compared the performance of 20 cohorts of HGFs over the 8 years following selection and our results suggest that:
* OECD vs. Top X% definitions - Some studies select HGFs are the Top X% over a period of time (ex. top 5% in revenue growth over 5 years). These definitions are more likely to capture firms with one-time growth events, and have higher volatility. In contrast, the OECD definition, as mentioned above, requires a high positive average rate of growth, and ends selecting firms with better features.
* More jobs vs. Higher productivity - It is not hard to see how these two goals are conflicting. Most often increased productivity comes in the same package with zero or negative employment growth. HGFs selected using Productivity indicators tend to give opposite results than expected: negative persistence, higher volatility and lower survival (ex. figure below). In terms of policy, if the goal is creating more jobs, using productivity as an indicator appears to be counter-productive.
* Varying distributions - HGFs are found in higher percentages in younger firms, larger firms and high tech sectors when using Revenue and Employees as indicators, but equally distributed in age, size, and industry when using Profit or Productivity. The indicator influences the characteristics of the firms selected.
The first evolution of perspective in entrepreneurship policy was marked by the shift from encouraging the creation of “more firms” to targeted programs aiming for “more high growth firms”, after a clear understanding that not all firms are created equal. We are now proposing a second evolution in both research and practice, from “high growth firms”, to “high-quality growth firms”, by pointing out that the definitions used in selecting and evaluating HGFs are also not created equal.
The article makes reference to unpublished research by Serban Mogos, Alex Davis, and Rui Baptista, at Carnegie Mellon University (US) and Instituto Superior Tecnico (Portugal). For comments or additional information, the lead author can be contacted at mogos@cmu.edu.
A preliminary version of the paper was presented at the DRUID15 conference.
References:
- Daunfeldt, S. O., Elert, N., & Johansson, D. (2013). The economic contribution of high-growth firms: Do policy implications depend on the choice of growth indicator?. Journal of Industry, Competition and Trade, 1-29.
- Delmar, F. (2006). Measuring growth: methodological considerations and empirical results. Entrepreneurship and the Growth of Firms, 1, 62-84.
- Henrekson, M. and Johansson, D. (2010). Gazelles as job creators: A survey and interpretation of the evidence, Small Business Economics, Vol. 35, pp. 227-244.
- Mogos, S., Davis, A. & Baptista, R. (2015). Defining High Growth Firms. Sustainable Growth, Volatility, and Survival. Proceedings of DRUID15 Conference. June 2015.
- Shepherd, D., & Wiklund, J. (2009). Are we comparing apples with apples or apples with oranges? Appropriateness of knowledge accumulation across growth studies. Entrepreneurship Theory and Practice, 33(1), 105-123.
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Serban Mogos is PhD Candidate in Technological Change and Entrepreneurship in a dual degree program at Carnegie Mellon University (USA) and Instituto Superior Técnico (Portugal), with research interests in high growth firms and entrepreneurship policy. Serban is also the Co-founder and President of Akcees, an NGO promoting entrepreneurship education in Romania, member of the Startup Nations. With additional background in Software Engineering and Product Management, Serban has been actively involved in startup communities across the world - Bucharest, Berlin, Lisbon and Pittsburgh.