Firm Size, Firm Growth, and Persistence of Chance : Testing Gibrat's Law with Establishment Data from Lower Saxony, 1978-1989

Examines the validity of Gibrat's law of proportionate growth using a set of 7,000 manufacturing establishments located in Lower Saxony, Germany. There are two important implications of determining whether this law holds -- policy should not be driven by firm size alone, and the identification of the role of chance in firm growth is necessary to better understand firm success. Data for the establishments studied in this analysis were collected from Germany's official monthly survey of firms from 1978 to 1989. These firms were divided into three categories of firm size: small (less than or equal to 50 persons), medium (more than 50 but less than 250 persons), and large (more than 250 persons). Results show that Gibrat's law only holds for more than half the periods examined for the small firms that manufacture basic products. Further, it is found that small firms do not grow faster or more slowly than larger firms. In direct contradiction to Gibrat's law, the growth rate of a specific firm is not independent from year to year, but rather, firms that showed strong growth in the first part of the period also showed strong growth in the second period. Further research is needed to examine the role of chance as a major factor in firm success. (SRD)