Firm survival

1. INTRODUCTION

During a recent period of time, the topic of firm survival has received increasing academic attention and many of the studies have focused on its determinants. It is well known that entrepreneurial small businesses contribute to the creation of the new jobs and innovations that helps to develop the economy and reduce the poverty. Some firms survive for considerably longer periods while others do not. The purpose of this paper is to discover research findings that are related to either the survival or death of young firms.

Starting a business and operating successfully is subject to uncertainty and requires resources and capabilities which is not available for everyone. Government takes action to reduce unemployment by encouraging new venture start-ups. The problem with new businesses is that there is a high possibility of failure. Subsequently, majority of young firms leave the market relatively soon after entering. It is therefore relevant to determine and understand the factors that have an impact on firm survival, as it is the widely used performance measure of the businesses.

The next part of the paper is concerned with the firm-based characteristics of fast growing firms. The observations are based on the UK and US comparative study of fast growing enterprises which were conducted in 2008. ‘Business growth is typically defined and measured, using absolute or relative changes in sales, assets, employment, productivity, profits and profit margins’ (Blackburn et al. 2008). There is no generally accepted definition of fast growth firms, however it is most often defined in terms of having high sales growth rate.

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The paper is organized as follows: Section 2 provides a review of the literature. In Section 3 differences in firm-based factors between fast growth firms and all other small and medium sized enterprises (SMEs) are discussed. Section 4 provides conclusion.

FIRM SURVIVAL DETERMINANTS

Large number of research papers on young firm survival focus on the person specific characteristics such as prior experience, education and motivation for success of the founder of the firm and business specific characteristics as industry, location, age and size of the company. In addition, Van Gelderen, Thurik and Bosma (2006) summarized that ‘start-up efforts differ in terms of the characteristics of the individuals who start the venture, the organization that they create, the environment surrounding the new venture, and the process by which the new venture is started.’

2.1 Person Specific Characteristics

In research report by Shane and Venkataraman (2000), it is suggested that success of the business could depend on the founder’s personality attributes or as Shane (2000) noted on the education of the entrepreneur and prior knowledge. Moreover, experienced founders of the young firm are more likely to take right strategic decisions than the ones with no prior experience. These determinants are considered as being essential for the better performance and decrease the probability of death of the firm.

Arribas and Vila (2007) suggested that entrepreneur’s human capital is a key determinant of the firm’s survival. Moreover, they came to a conclusion that the larger the number of entrepreneurs founding the company, the higher will be the chances of survival. One interesting feature to note about human capital stock is that initial larger human capital will add value to the firm and decrease the probability of death but the subsequent changes in human capital will have little impact on the firm survival (Geroski, Mata and Portugal, 2007). On the one hand, researchers argue that the human capital relevant to increasing the chances of survival are measured by the prior knowledge of the entrepreneur, level of education, experience in doing business in that industry and the entrepreneur’s motivation for prosperity. On the other hand, others contend that the personal determinants are not that influential on the firm’s survival or death (Wicker and King 1989). Nevertheless, the education of the founder may not have a specific impact on the firm’s survival or death, but the knowledge gained by learning and working in the specific industry will influence the way how the entrepreneur responds to the challenges of doing business.

2.2 Business Specific Characteristics: industry sector, location, age and size

The survival performance of entrepreneurs varies across industrial sectors, as some industries decline, while others expand. ‘There is a negative relationship between industry growth and firm survival, because growing industries are in earlier stages of the industry life cycle when requirements of adjusting to a changing environment, therefore leading to greater risk of failure’ (Strotmann, 2007). In contrast, there is a positive relationship between the firm survival and industry relevant experience, because it influences entrepreneur’s ability to successfully launch the business and compete within that industry. Here, the point is that entrepreneurs with experience in the same industry as their current business will have a more network of industry suppliers and partners and will have a better understanding of the challenges of the industries in which they are going start a business.

According to Fertala (2007) not much of attention was given to the regional differences as a determinant of firm’s survival or failure. Choosing the appropriate location also has an impact on the business processes. The reason why the location plays an important role in the firm’s survival or failure is that different regions offer different resources for the company and the cultural environment varies across countries. According to the study, entrepreneurs operate their business close to the place where they live (Mueller and Morgan, 1962). Empirical evidence suggests that locating the firm closer to the suppliers, customers and business partners increases the probability of survival. In addition, Strotmann (2007) contends that the risk of firm death is 30% more in urban areas compared to rural regions. The reason for this might be the high level of salaries and intense competition in urban areas.

Fontana et al. (2009) stated that ‘coefficients for age at entry and size are all negative and significant, indicating that bigger firms, endowed with better availability of financial capital have a relatively higher probability of surviving.’ There are number of reasons for this to be the case. Firstly, large firms have an advantage over a small firm in a way that it has more access to finance, e.g. stock markets and debt financing. Moreover, large firms are more diversified than small firms, therefore they have less risk of failure. Falck (2007) summarised that the size of the firm is the best indicator of failure at the firm level and considered to be an overall measure of access to human capital and financial resources. In addition, Shane and Foo (1999) suggested that greater age will increase the probability of survival. This is not surprising, as the studies show that the most of the businesses fail in the early years of their operations.

3. FAST GROWTH FIRMS

Barringer, Jones and Neubaum (2004) wrote that there is a limited knowledge on what determinants influence the firm growth. Authors gave a definition of fast growth firms as ‘firms with a 3-year compound annual sales growth rate of 80% or above’ (Barringer, Jones and Neubaum, 2004).

Smallbone, Leigh and North (1995) compared 70 high growth firms with the other 236 surviving companies. Authors assessed these high growth firms on the basis of the following criteria: ‘(1) Rapid growth: i.e. more than doubling sales turnover in real terms over the 1979-90 periods. (2) Significant size: i.e. reaching a minimum sales turnover of £0.5m. (3) Financial stability: i.e. consistent profitability in the late 1980s’ (Smallbone et al. 1995). The interesting feature that the authors noted is that fast growth can be attained by the firms with different size, age and industry characteristics. According to this study, the factors that differentiate high growth firms from other SMEs are that best performing firms are paying more attention to their products and markets by investing in R&D, focusing on growth through their mission and strategies, opening to new markets and taking strategic decisions that will make the firm more competitive. Similarly, another study conducted in 2008, compares the growth challenges of UK and US firms proves that, product and market development are key determinants of growth in both countries (Blackburn et al. 2008). Moreover, the study investigates that US firms were able to achieve the targeted growth by operating in US market; in contrast UK firms were involved in exporting to achieve growth. Subsequently, UK firms are subject to expansion barriers compared to US firms, however UK firms are more diversified and have higher survival probabilities in case of economic downturn. In addition, fast growth firms have a stronger commitment to growth and deeper level of customer knowledge than the firms with low performance indicators (Blackburn et al. 2008). Furthermore, authors observe that product innovation is a key determinant of firm’s growth. They came to that conclusion by interviewing UK and US business owners who reported that product innovation is a primary motivation for new venture start-up.

Finally, Sapienza, Autio and Zahra (2003) argue that internationalization increases young firms’ probability of failure but at the same time increases prospects for growth. Entering the international market is often costly and firm may not survive after doing business in a foreign country. Moreover, it was observed that starting to operate internationally soon after entering the market is very risky. However, some firms decide to internationalize in their first years of their operations in order not to lose the available opportunity (Sapienza, Autio and Zahra, 2003). Finally, the study shows that some entrepreneur’s consider failing in one or more start-ups as an experience before succeeding in their business.

4. CONCLUSION

Overall, the results of the studies show that entrepreneur’s experience, education level, firm location, age, and size of the firm are vital determinants of firm survival. The empirical evidence suggests that while both individual and business characteristics shape young firm survival within the first years after entry, in the long term, business factor such as firm size, which is measured by financial and human capital have little effect on the probability of survival, while other factors still have a considerable impact on the firm’s performance.

By investigating the factors that lead the firms to grow rapidly, researchers can help all firms better understand the determinants associated with firm growth. The result obtained here is that fast growth firms’ attributes of success which discriminates them from other SMEs are successful R&D investments, product innovation, and focusing on growth through their mission and strategies. Taken as a whole, achieving fast growth is a task of management, similar to the other entrepreneurial challenges that they face.

Finally, there is a negative relationship between firm survival and internationalization. However, internationalization opens opportunities for growth for businesses and it is the choice of entrepreneurs to enter or not the international market at the early years of their new venture operations in accordance with the opportunities they have.