How do US firms grow? New evidence from a growth decomposition

Research SummaryFirm growth and its underlying modes are rarely examined on their own, which impedes our understanding of their relative importance, correlations among them and their associations with competition and future performance. We address these using a comprehensive seven‐mode decomposition of employment growth in all US firms (2004–2013). We find that organic modes such as opening or closing plants contribute more than transactional modes such as acquisitions and selloffs, and that growth modes exhibit age‐size differences and are generally positively correlated within firms. Trade competition in manufacturing increased closures and decreased acquisitions but had no effect on new units. Transactional growth positively correlates with future survival, unlike organic growth. Together, our findings expand our understanding of firm growth as a composite of multiple growth modes.Managerial SummaryManagers have many ways to grow a firm, but studies typically emphasize transactional modes such as acquisitions and selloffs. Using data on all US firms over 2004–2013, we study seven growth modes in an integrated and comprehensive model. We find that organic modes contribute more to growth than transactional modes, that young, large firms grow less relative to old, large firms, that when firms grow (shrink), they tend to grow (shrink) using multiple modes simultaneously and that growth modes vary in their association with competition. Importantly, transactional growth positively correlates with future survival, unlike organic growth. Together, these findings not only suggest that growth modes vary in their contribution to firm growth but also that they may differently influence subsequent performance.