ENTRY, GIBRAT'S LAW, INNOVATION, AND THE GROWTH OF FIRMS

Abstract

and death of firms, we lack even crude answers to the following basic questions regarding the dynamic processes governing an industry's structure. What are the quantitative effects of various factors on the rates of entry and exit? How well can the growth of firms be represented by Gibrat's law of proportionate effect? What have been the effects of successful innovations on a firm's growth rate? What determines the amount of mobility within an industry's size structure?' This paper provides some tentative answers to these questions. First, it constructs some simple models to estimate the effects of an industry's capital requirements, profitability, and other such factors on its entry and exit rates. Second, it investigates how well Gibrat's law of proportionate effect can represent the growth of firms in each of the industries for which we have appropriate data. Although this law has played a prominent role in models designed to explain the size distribution of firms, it has been tested only a few times against data for very large firms. Third, we estimate the difference in growth rate between firms that carried out significant innovations and other firms of comparable initial size. The results help to measure the importance of successful innovation as a cause of interfirm differences in growth rates, and they shed new light on the rewards for such innovations. Fourth, the paper presents and tests a simple model to explain interindustry and * The author is associate professor of economics at Carnegie Institute of Technology. This paper, a preliminary version of which was read at the August 1961 meetings of the Econometric Society, will be reprinted as a Cowles Foundation Paper. The work on which it is based is part