Firm growth dynamics: The importance of large jumps
Yoshiyuki Arata 23 August 2014
One of the main models in industrial organisation assumes that firms grow in a response to many small shocks that satisfy the central limit theorem. This column shows that if the shocks do not follow the central limit theorem, then the firm growth follows a jump process. Such large jumps could be due to radical innovation and are vital for the long-term success of a firm.
How a firm grows is one of the important themes in the industrial organisation literature and has been discussed extensively. An influential paper is the seminal work by Gibrat (1931), which continues to receive much attention in the theoretical and empirical literature (for a review, see Sutton 1997). If the growth rate of a firm is defined as the difference in the logarithm of the firm’s size, Gibrat’s model is described by the following assumptions:
Industrial organisation Productivity and Innovation
firm growth rate, jump growth, radical innovation