Empirical analysis of new firm growth factors using

Russian data

Galina V. Shirokova - Associate ProfessorAlexander I. Shatalov - Ph.D StudentMaria Y. Molodtsova – MIB Student

Research goal and object

The goal - is to discover key internal and external growth factors for Russian entrepreneurial firms.

Object – Russian “entrepreneurial firms”

“Entrepreneurial firms” - firms that are fairly young relative to settled companies and have potential for an increase in size and profitability (Bhide, 2000; Zott, Amit, 2005)

Topic background

The most popular single unitary indicator of company’s growth is the growth in sales (Ardishvili et al., 1998; Hoy, McDougall, Dsouza, 1992; Weinzimmer et al., 1998; Wiklund, 1998)

The growth is not the norm for any organization

Different factors can stimulate or become an obstacle for the firms growth

Topic background and hypotheses

There exists proof that steady enterprise growth is to some extent determined by external factors (Carroll, Hannan, 2000; Davidsson, Delmar, 1997, 2001; Jovanovich, 1982, Wiklund, 1998)

basic barriers to entrepreneurial development in Russia (Astrakhan and Chepurenko, 2003)

the example of the research which studies the environmental influence on the organizational growth

H1: Higher level of environmental generosity will correspond with higher rates of growth in entrepreneurial firms

Topic background and hypotheses

Michael Porter (2005) theory of competition

Н2: The greater the intensity of competition, the lower the growth rates of for entrepreneurial firms

H3: The greater the level of diversification of buyers, the greater the tempo of growth for a firm

Н4: The greater the level of diversification of suppliers, the greater the tempo of growth for a firm

Topic background and hypotheses

The firm’s internal dynamics receive a significant portion of scholarly attention

Six fundamental determinants of growth: a firm’s age, size, sector, site, legal form of business, and property (Storey, 1994)

The smaller and younger firms grow faster (Evans, 1987)

However, Das discovered a positive correlation between age and growth rates (Das, 1995)

Н5: The older the Russian entrepreneurial firm, the lower the growth rate will be

Topic background and hypotheses

One direction of research into internal determinants of growth is the relation between the skill level of personnel and the rate of growth in sales

Results of analyses have been contradictory: Almus (2002) discovered a positive correlation between employees’ skills and the growth rate while Robson and Bennet (2000) did not find statistically significant relations between these variables (Robson, Bennet, 2000)

Н6: Firms with higher-skilled personnel will exhibit higher rates of growth.

Topic background and hypotheses

Hannan and Freeman (1984): the reorganization of the firm reduces the reliability of business results because of fluctuations of quality and timeliness of collective actions decrease during reorganization

Н7: Firms that undertake serious organizational reforms grow more slowly than those firms that do no undertake such reforms.

Topic background and hypotheses

Notha and Neir (1995) showed that hi-tech companies grow more quickly, and Lumpkin (2006) also found the direct dependence of growth rate on innovativeness.

Nevertheless, studies show that there are not significant relations between level of innovation and a company’s growth rate (Garnsey, 2006)

Н8: Companies that invest in research and development exhibit higher rates of growth

Sample Description

Survey data on the entrepreneurial environment and enterprise (BEEPS), undertaken by the European Bank of Reconstruction and Development and the World Bank in 2005 (9500 firms from 28 countries )

A sample of 276 Russian entrepreneurial firms was created

The majority of sample were small and medium size firms (72% of the companies have less than 50 employees and 21% have from 50 to 250 constant employees)

The age of companies varies from 4 to 18 years. The sample is distributed among different

industries

The model description

The OLS regression analysis was applied to analyze the data

The model is as follows Y= ß0+ß1x2+ß2x2+ß3x3+ß4x4+ß5x5+ß6х6 + ß7х7 + ε

The dependent variable in our analysis was the change in the sales volume over three years

The independent variables in our model included three main types of factors: external (environmental generosity, diversification of suppliers and buyers, intensity of competition), internal (fundamental organizational changes, professional labour, R&D investments), and age of the company

The model description (Variables)

Environmental generosity - the aggregation of estimates by company heads of various external circumstances (such as access to financing, cost of financing, tax policy level of corruption etc.)

Degree of diversification of suppliers and buyers - the standard deviation of the sales volume in various markets and volumes of purchases from various suppliers from the equal distribution of the sales/purchases among different markets

Intensity of competition the quantity of competitors for each concrete firm at the moment of the survey.

The model description (Variables)

The quantity of skilled employees was measured as a percentage of employees with a higher education

The age of company (2005 – the year of establishment)

For the volume of investment in R&D and fundamental organizational changes dummy variables were created

Organizational changes included: development of a major new product line/service, upgrade of an existing product line/service, new joint venture with foreign partner, outsourcing of a major production activity/serice, bringing in-house of a major production activity/serice, obtaining of a new quality accrediation

General characteristics of the regression model

Model ß coefficient

R2 ,311 Adjusted R2 ,274 F statistics 8,406

Significance 0,000 N 276

The results of the regression analysis

Model ß coefficien

t

t Sig.

(Constant) 93,150 4,81 ,000

Qualified employees ,322 3,06 ,002

Suppliers -1,077 -6,2 ,000

Buyers -1,438 -4,76 ,000

Competitors ,329 1,56 ,120

Generosity ,055 ,321 ,749

Improving a line 5,717 1,190 ,235

Reducing a line ,469 ,075 ,940

Joint venture 2,341 ,192 ,848

Production of a new good -3,282 -,586 ,558

Outsourcing a process 5,141 ,591 ,555

Bringing outsourced process back 4,265 ,431 ,448

Introducing quality 23,278 2,129 ,034

Research & development 8,827 1,119 ,264

Age -1,048 -2,015 ,045

Results

The model is statistically significant

We can accept hypotheses Н3 and H4: the estimated ß coefficient is significant and negative, that means that the higher level of diversification leads to the higher growth of the company

We can accept hypothesis Н6: the estimated ß coefficient is significant and positive and confirms that the skill level of personnel positively influences growth rates of Russian entrepreneurial companies.

Results

We can accept hypothesis Н5: the estimated ß coefficient is significant and negative, that proves the negative influence of the age of the company on its growth

We can’t accept hypothesis Н7: the only statistically significant variable in the group of the organizational changes is the introduction of the quality management and it’s positively related with the firm’s growth

All other hypotheses can’t be accepted

Study limitations

Peculiarities of the data and restrictions in using a questionnaire designed for studying the business environment,

Lack of internal factors No personal characteristics and intentions of owners and

managers on growth

The possibility of the U-shaped relation between carrying out organizational changes and growth rates

Among the classifications of growth factors for the firm in research literature, three categories stood out: external factors, internal variables, and characteristics of the leadership and managerial team. In this study we considered only the first two sets of variables

Conclusions

Studying growth factors for entrepreneurial firms is an important area of business research

The present study attempted to reveal those factors that significantly influence growth of entrepreneurial firms in Russia.

Both external and internal factors were analyzed.

Several variables are statistically significant: Among environmental factors - diversification of

suppliers and buyers Among the internal factors - the share of qualified

personnel, the age of the firm and the quality system establishment

Thank you for your attention