What Affects Small Business Growth? Part I: Ambitions, Aspirations, Intentions

Several months ago, I (Mina) wrote on controlled growth. In the next few entries, I’d like to talk about what affects growth in the first place. We have frequently been hearing the statistic that 70 percent of all new jobs are created by small businesses. But the fact is that the majority of the firms in the U.S. provide hardly any jobs. Many businesses do not ever have employees in their lifetimes, and even those that do have employees have only a few – 61 percent of employer firms have fewer than 4 employees. It turns out that only a handful of firms grow its employment by at least 15 percent per year – 6 percent of all businesses according to the National Commission on Entrepreneurship – and these few firms create the majority of new jobs.

If these few firms are so important to the economy, the question is: What affects whether or not a firm grows? What makes some firms the kind of rapid-growth firms that we count on to grow jobs while others fail, struggle or slowly grow at best? I recently took a look at about 30 scholarly studies on small business growth. The next few posts reflect what I found.

Ambitions and Aspirations

Of the many studies on what makes small businesses grow, one of the most consistent findings is the significant role of founder aspirations on the actual growth of their companies. Simply put, without ambition and the intention to grow, it won’t happen. However, when business owners do aspire to growth, these aspirations can have enormous impact on the future of their companies.

In a study of over 800 firms, researchers Delmar and Wiklund found that growth motivation at a given time point has a significant and positive effect on employment and revenue growth 3 and 4 years down the line. Another set of researchers, Stam and Wennberg, examining 647 firms over six years and testing numerous factors that might possibly affect growth (such as innovation, experience, industry) concluded that small business growth, especially in less technology-oriented industries, appear to be driven mainly by owner/founder ambitions.

Not only do growth aspirations matter, communicating this commitment can also make a difference. When researchers Barringer, Jones and Neubaum compared 50 rapid-growth firms and 50 slow-growth firms (with an average compound annual growth rate of 167.29 and 1.55 percent over three years, respectively), they discovered that the founders of the rapid-growth firms were more likely to articulate growth as a firm objective and to include growth in their written mission or vision. This result was consistent with earlier findings by Doorley and Donovan that 60% of the rapid-growth firms in their study had put their growth vision in writing, whereas only 15% of the slow-growth firms had done the same. In line with these two studies, in a 6-year longitudinal study of 229 small businesses, Baum and Locke found that the growth vision the entrepreneurs/CEOs communicated to their employees, the goals they set for growing the firm, and their faith in their abilities to growth the companies significantly affected the growth of the firms.

If growth ambitions are so important to actual growth, what affects such aspirations?

Delmar and Wiklund found that the older the CEO of the company, the lower the growth motivation and the slower the growth of the firm both in terms of employees and in terms of revenue. They also found that education affected growth similarly: CEOs with the longest education had the highest growth motivation. The lowest growth motivation was found in employed CEOS (those who did not start, inherit or buy the firm).

Reasons for starting a small business can affect growth aspirations as well. In a study of 170 businesses, Cassar found that those who cited financial success as the reason for starting a business showed greater intent to grow and that those who cited independence as the main reason for starting a business showed lower levels of growth intentions. Correspondingly, those who were motivated by financial success and had a high level of growth intention also showed higher actual sales and higher employment. Those who cited independence showed lower employment.

-Mina

Coming up next: Business owner background and business growth

Sources:
Barringer, B. R., F. F. Jones, et al. (2005). "A quantitative content analysis of the characteristics of rapid-growth firms and their founders." Journal of business venturing. 20(5): 663.

Baum, J. R. and E. A. Locke (2004). "The Relationship of Entrepreneurial Traits, Skill, and Motivation to Subsequent Venture Growth." JAP Journal of Applied Psychology 89(4): 587-598.

Cassar, G. (2007). "Money, money, money? A longitudinal investigation of entrepreneur career reasons, growth preferences and achieved growth." Entrep. Reg. Dev. Entrepreneurship and Regional Development 19(1): 89-107.

Delmar, F. and J. Wiklund (2008). "The Effect of Small Business Managers’ Growth Motivation on Firm Growth: A Longitudinal Study." Entrepreneurship Theory and Practice 32(3): 437-457.

Doorley, T. L. and J. M. Donovan (1999). Value-creating growth. San Francisco, Jossey-Bass.

Stam, E. and K. Wennberg (2009). "The roles of R&D in new firm growth." SBU Small Business Economics 33(1): 77-89.