Do Firm Growth Models Work in Service Industries in Developing Economies? An Investigation of the Relationship Between Firms’ Growth, Size and Age

Abstract

Growth models such as Gibrat’s law and Jovanovic’s theory that examine the relationship between the firms’ growth, age and size have either been tested on data from developed economies or from the manufacturing sectors in developing economies. This study checks the suitability of these models in service sectors in developing economies as service sectors have distinct characteristics and developing economies such as India are heavily dependent on this sector. The current study considers three major service sectors contributing to India’s economy vis-à-vis financial services, information technology and real estate for the period 2002–2005. We observed that during 2002–2005, India’s economy was stable without wide fluctuations in economic performance, such as gross domestic product, unemployment or inflation. These sectors not only had a significant impact on economic growth but also had comprehensive microeconomic data. Our results negate both Gibrat’s law and Jovanovic’s theory. We argue that service sectors which are knowledge-intensive will experience different growth patterns compared to manufacturing sectors. We find a definite and significant relationship between firms’ growth and their size and age. Also, we find concluding evidence that younger firms up to 10 years of age struggle a lot more than older firms in the Indian service sector. JEL: D20, D21, D22, D02