Empirical analysis of new firm growth factors using Russian data Galina V. Shirokova - Associate Professor Alexander I. Shatalov - Ph.D Student Maria 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= ß 0 +ß 1 x 2 +ß 2 x 2 +ß 3 x 3 +ß 4 x 4 +ß 5 x 5 +ß 6 х 6 + ß 7 х 7 + 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 Modelß coefficient R2R2,311 Adjusted R 2,274 F statistics8,406 Significance0,000 N 276

The results of the regression analysis Modelß coefficienttSig. (Constant)93,1504,81,000 Qualified employees,3223,06,002 Suppliers-1,077-6,2,000 Buyers-1,438-4,76,000 Competitors,3291,56,120 Generosity,055,321,749 Improving a line5,7171,190,235 Reducing a line,469,075,940 Joint venture2,341,192,848 Production of a new good-3,282-,586,558 Outsourcing a process5,141,591,555 Bringing outsourced process back4,265,431,448 Introducing quality23,2782,129,034 Research & development8,8271,119,264 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

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