BEMM108
Individual assignment
Growth Businesses are different
QIAN CHENG 630013092
Table of contents
Introduction ............................................................................................................ 3
Definition ................................................................................................................ 3
Entrepreneurship and Growth Business ................................................................. 3
Discussion about Entrepreneurship ........................................................................ 4
Conclusion ............................................................................................................... 6
Reference ................................................................................................................ 8
Introduction
In recent years there is an increasing interest of policy makers around the world to support and
foster fast growth enterprises including companies named “gazelles” or “gorillas” in terms of its
size and age. These businesses are often viewed as important driving power of economic growth,
employment rate and even social well-being (Stefan, 2011). However, some firms grow but others
do not, which still remains debated (Candida, Dennis, Robert, 2009) and leads to the argument
that it is a dangerous assumption that all growth businesses can be a bullet that will create jobs,
generate innovation and conduct sorts of economic benefits (Scott, 2009). This essay will first
present the definition of high-growth business and then dialectically demonstrate the role of the
defined growth business by mainly discussing issues of entrepreneurial activity before the final
conclusion.
Definition
Perhaps the simplest method to distinguish high-growth business from other firm is to define it
according to several predetermined threshold and those who are satisfied with these threshold
can be seen as growth business (Ahmad, Petersen, 2007). Traditionally, high-growth business
often refers to the concept of gazelle firm which is defined as “All enterprises up to five years old
with average annualized growth greater than twenty percent per annum over a three-year
period, and with ten or more employees at the beginning of the observation period.” by OECD
(2007) (Audretsch, 2012). On the other hand, another two basic attributes are often used to
define a high-growth business: a strong growth of size of its number of employees and this
growth of size should happen over an intensive period (OECD, 2010). Both employment and
turnover should be taken into account and thus high-growth business is defined by the
Organization for Economic Co-operation and Development as “all enterprises with average
annualized growth greater than 20% per annum, over a three year period, and with ten or
more employees at the beginning of the observation period. Growth is thus measured by the
number of employees and by turnover.” The definitions from OECD will be adapted as the
standard in this essay.
Entrepreneurship and Growth Business
By traditional view, gazelles, as a subset of high-growth business, may often be affiliated with
entrepreneurial activity (Stefan, 2011) which is one of the central factors in economic
development (David, 2003). Entrepreneurs not only manage to identify and grab profitable
opportunities, they also take risks in order to achieve their goals (OECD, 2002). Countries with
constant entrepreneurial activities are more likely to generate new products and services by
which older ones are replaced (OECD, 2002). The process obviously concerns all economic
activity and is not only related to high-technology areas or particular industry. At the same time,
entrepreneurship can characterize the behaviors of both new and well operated firm as well as
small and large business. Due to the breadth of the concept of entrepreneurship, there is no
accurate measurement of entrepreneurship. However, in practice, new companies and
innovation are two main features of entrepreneurship (OECD, 2002). According to the Knowledge
Spillover Theory of Entrepreneurship (Audretsch, Keilbach and Lehmann, 2006, Acs,
Braunerhjelm, Audretsch and Carlsson, 2009; Audretsch and Keilbach, 2007), high growth firms
are often expected to be related to the firm-oriented characteristics of size and age and growth
firms may particularly expected to be young and small companies (Audretsch, 2012). The
relationship between entrepreneurship and firm growth can be depicted as figure 1. In this essay,
new and young venture will be seen as one of the main components of growth business and
dialectically discussed.
Figure 1
Discussion about Entrepreneurship
It is generally believed that entrepreneurship is beneficial for economic growth and national
development (Wim, 2013). There are various statements in the empirical literature presenting
the relationship between entrepreneurship and economic growth and national development
(Carree; Thurik, 2002). It is reported by OECD (2002) that growth firms which are measured by
employment expansion rates and are often related to new and young firms account for a large
portion of jobs created and play as a key role in economic growth. There exist a general claim of
entrepreneurship that new and young business leads to economic growth and overall
development (Maria, 2008). At the same time, program of supporting entrepreneurship has
become a core part of economic strategies in many countries (Heather; Mark, 2011). Recent
studies present that the contribution of the entrepreneurial activity to employment rate and GDP
is increasing (Audretsch & Thurik, 2001; Birch, 1987; Kumar & Liu, 2005). Audretsch and Thurik
(2001) argue that the entrepreneurial sector plays a more crucial role in national development
and smaller and more flexible entrepreneurial firms become more important in an increasingly
knowledge-based economy (Maria, 2008). Gilbert, McDougall, and Audretsch (2006) suggest that,
in the last 20 years, smaller and more dynamic businesses have been seen as key drivers of
development, and a set of national policies are designed to promote entrepreneurial activity
everywhere (Maria, 2008). Figure2 shows a conceptual model developed by Global
Entrepreneurship Monitor demonstrating the systematic relationship between entrepreneurial
activity and national economic growth (Amit, 2012).
Figure 2
New firms not only bring macro-economic benefits but also micro-economic benefits. It is
suggested that new startups not only constitute a large part of high-growth business but also
contribute a lot to employment rate (Audretsch, 2012). There is also evidence that new business
create more new job than that of average firms, which leads to its important role in an economy
(Mitusch; Shimke, 2011). Studies by Fritsch and Mueller (2004) using data for Germany, and
Mueller, van Stel and Storey (2008) with longitudinal data from the Netherlands, and Acs and
Mueller (2008) utilizing longitudinal data for the United States all show significant evidence that
new and young companies considerably contribute to the growth of employment (Audretsch,
2012). Their studies also observe the impact of the new business on employment over a period
of time after the establishment of the firm. As Figure 3 shows, the employment impact is high in
the first year of the foundation of firm and then decreases in following years (Audretsch, 2012).
Figure 3
As supporting entrepreneurship becomes one of the core strategies for many countries in order
to make contribution to economic growth, there are also many studies concern that policy maker
believe in a dangerous myth (Scott, 2009) and evidence on whether entrepreneurship
contributes to economic growth is not obvious (Wim, 2013). This belief is flawed since it is not
always the reality that all entrepreneurial business can generate job, enhance economic growth
and boost innovation. It is found that owner of new firm do less on R&D and their contribution to
productivity growth is relatively low (Wim, 2013). Wim (2013) also argue that majority of
entrepreneurs would earn more than wage employees, and while entrepreneurs bring more job
creations compared to non-entrepreneurs, the quality of jobs they offered is often low. Therefore
not all entrepreneurial activities drive economic development, and not all entrepreneurs are
innovative (Shane, Stam and Wennberg, 2009). Getting economic growth and new jobs from
entrepreneurial activity is not a number game but to chase for high quality and high growth,
namely not every new and young firm is growth business (Scott, 2009). Scott Shane (2009) argues
that encouraging entrepreneurship may not be a good policy since new venture is not always the
source of economic growth and job creation. According to the research of Haltiwanger, Lane, and
Speltzer (1999), it is observed that company’s productivity often increases with firm age, which
means that most of new firms make worse use of resources than that of existing larger firm and
economic benefits are achieved more from expansion of large firms than that of new and small
businesses. New firms contribute to a minority of gross and net new employment. In fact, in
order to make the assumption that 50 percent of net new jobs are generated by new businesses
all firms that are nine years old or less have to be considered as ‘‘new’’ business (Scott, 2009).
Anyone knows that nine-year-olds are not ‘‘new’’. In Daniel and Ross’s view (2014), it is wrong, at
least misleading, by saying that “Small business is the backbone of our economy” (Obama, 2010)
or” New businesses are the lifeblood of a healthy… economy” (Cameron, 2013) because it is
more wise to bet on high-growth firms than on new and young business which is often seen as a
subset of all high-growth firms.
Conclusion
By definition, growth business should take “all enterprises with average annualized growth
greater than 20% per annum, over a three year period, and with ten or more employees at the
beginning of the observation period. Growth is thus measured by the number of employees and
by turnover ” into account and new and young firms count little among all growth firms. In
reality, it is a small minority of new and young businesses that grow significantly and create the
majority of economic and other benefits. Entrepreneurial business as kind of growth business is
often associated with employment, economic development and innovation. However, when it
comes to relationship between entrepreneurship and employment, the results are often different
(Audretsch, 2012). In fact, those high-growth firms contribute to most of the employment rate
growth are often larger and more mature and they tend not to be in any particular industry or
sector. Growth represents a phase during the life of an enterprise and it is not a characteristic of
a specific subset of firms. Studies of Davidsson, Steffens and Fitzsimmons (2006) suggest that
growth may not be a good sign of enterprise development. Another fact is that in any country,
high-growth businesses represent a minority of the overall number of enterprises. As is shown in the
figure 3 which is the data collected by OECD, these firms represent on average 3-6% and 8-12% of all
firm population when growth is measured by employment (Figure 3.1) and turnover respectively
(Figure 3.2). The number of new and young growth business is also very small in all countries. The
gazelles represent on average less than 1% and 2% by employment and turnover respectively of the
total population (Figure 3.3, Figure 3.4), and less than 1/5 of high-growth enterprises. Nevertheless,
the main trends of high-growth business also apply to new firms namely gazelles. It is reported by
OECD (2008) that high growth in young manufacturing firms is more likely to occur in terms of
turnover and in services industry high growth in new firms happens in terms of both employment and
turnover.
Figure 3.1
Figure 3.2
Figure 3.3
Figure 3.4
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