EASTERN EUROPE: A DYNAMIC PANEL ANALYSIS Prof. Miroslav Mateev - PowerPoint PPT Presentation

ON THE GROWTH OF MICRO, SMALL AND MEDIUM SIZED FIRMS IN CENTRAL AND EASTERN EUROPE: A DYNAMIC PANEL ANALYSIS Prof. Miroslav Mateev American University in Bulgaria 2012 Annual Meeting of BMA, Sofia 1 12/10/12 April 22, 2012

Motivation: The empirical research has suggested that firm • growth is determined by both: (1) the traditional characteristics of size and age, and • (2) other firm-specific factors such as indebtedness, internal • financing, future growth opportunities, process and product innovation, and organisational changes. An increasing body of literature indicates that small and • medium sized enterprises (SMEs) are of major importance for macroeconomic growth. Limited empirical evidence has been provided so far on which • of these determining factors are associated with SMEs growth and performance in transition economies. 2012 Annual Meeting of BMA, Sofia 2 12/10/12 April 22, 2012

Previous research examined: (1) The impact of financial constraints on investment decisions and firm growth : Oliveira and Fortunato (2006) find that small firms face • greater financial constraints and that these have a negative impact on their growth. Audretsch and Elston (2002) also show that medium sized • firms face greater financial constraints than large firms. Birks and Ennew (1996) assert that younger firms are more • financially constrained than older ones. Müeller and Zimmermann (2008) also observe that SMEs • face additional disadvantages. Sarno (2008) finds that access to financial markets and • provision of external resources are more problematic for small firms. 2012 Annual Meeting of BMA, Sofia 3 12/10/12 April 22, 2012

Previous research (…) (2) How the mix between internal and external funds is linked with firm real performance and growth: Financial constraints and pecking order hypotheses (Almeida et • al. 2004; Faulkender and Petesen 2006; Pàl and Ferrando 2006). Trade-off theory put forward by Acharya et al. (2005). • Corporate finance literature and the agency cost problems • (Jensen, 1986). A different approach suggests that financial constraints may • also explain the relation between firm size and growth (Carpenter and Petersen, 2002, Elston, 2002, Wagenvoort, 2003, Fagiolo and Luzzi, 2004, Hutchinson and Xavier, 2006) 2012 Annual Meeting of BMA, Sofia 4 12/10/12 April 22, 2012

Previous research (…) (3) Firm size and age as traditional determinants of growth: A negative relation between age and growth was predicted by • Jovanovic’s (1982) model, and revealed in a number of empirical studies and in different country contexts (see Evans, 1987b and Dunne et al., 1989 for US; Dunne and Hughes, 1994 for UK; Hamshad, 1994 for France; Farinas and Moreno, 2000 for Spain; Becchetti and Trovato, 2002 for Italy; Nurmi, 2003 for Finland). Exceptions are provided by Das (1995) and Elston (2002); • both studies found a positive effect of firm age on a firm’s growth. Wagenvoort (2003) estimates based on Carpenter and • Petersen’s (2002) model that growth to cash flow sensitivity of SMEs is broadly similar across EU countries. 2012 Annual Meeting of BMA, Sofia 5 12/10/12 April 22, 2012

Previous research (…) (4) The relationship between the entrepreneurial orientation (EO) of the firm and its performance: Wiklund, Patzel, & Shepherd (2009) claim that entrepreneurial • orientation of a company is essential for the flexibility and quick decision making of a small company. Moreno, & Casillas (2008) find that EO and growth are positively • related, although their relationship is more complex. Freel, & Robson (2004) find a positive relationship between • novel product innovation and growth in employment and, for manufacturing firms, a negative relationship between product innovation and growth in sales or productivity. Thornhill, Gellatly, & Riding (2004) find a strong correlation • between capital structure and knowledge intensity. In contrast, growth histories are not obvious determinants of financial structure. 2012 Annual Meeting of BMA, Sofia 6 12/10/12 April 22, 2012

Research questions: This study aims to fill in the gap in the current • debate on the determinants of SMEs growth in Central and Eastern Europe. (1) We explore the question whether and to what extent the growth in SMEs in transition economies can be explained by both traditional and firm-specific characteristics. (2) A second question we address in this paper is whether the growth and performance of fast-growing SMEs is determined by the same firm-specific characteristics as slow-growing SMEs. (3) Finally, we argue that size and age sensitivity of growth is significantly different for SMEs that grow faster compared to firms that grow slower. 2012 Annual Meeting of BMA, Sofia 7 12/10/12 April 22, 2012

Data set and Methodology: We examine data from seven transition economies (out of 13 1. countries): Bulgaria, Croatia, Czech Republic, Poland, Romania, Serbia and Slovakia (see Table 1). Number of firms: 4,561 SMEs • Data period: 2001 – 2005 • In total: 22,805 observations • Balanced panel data. • Two sub-samples: fast-growing (3,280) and slow-growing 2. SMEs (1,281). Eurostat and OECD definition of high-growth enterprises 3. (HGEs): at least 20% annual employment growth on average over the last three years but instead of employment growth we used growth in sales revenues. 2012 Annual Meeting of BMA, Sofia 8 12/10/12 April 22, 2012

Table 1: Geographical distribution of sample firms by size, age and sector Bulgaria Croatia Czech Poland Romania Serbia Slovaki Total Republic a Size (as of 2005) Micro (< 10 employees) 5 25 28 21 15 3 15 112 Small (< 50 employees) 31 162 130 179 113 27 27 669 Medium (< 250 employees) 108 431 1009 924 933 275 100 3,780 Total : 144 618 1,167 1,124 1,061 305 142 4,561 Age < 5 years 0 7 0 20 46 5 2 80 5 - 10 years 41 139 186 261 346 20 38 1,031 10 - 20 years 84 324 932 542 669 162 95 2,808 > 20 years 19 148 49 301 0 118 7 642 Total : 144 618 1,167 1,124 1,061 305 142 4,561 Sector Agriculture, Fishing& Mining 0 22 108 15 4 23 4 176 Construction 14 67 69 76 128 33 7 394 Financial Intermediation 4 8 16 20 0 0 5 53 Hotels and Restaurants 1 25 11 2 12 3 0 54 Manufacturing 32 137 462 365 438 114 49 1,597 Public Administration, Education, Health and Social Work 1 2 20 17 2 4 2 48 Real Estate, Renting and Business Activities 22 47 96 198 76 18 18 475 Transport, Storage and Communication 7 28 47 41 61 14 3 201 Utilities 1 21 42 47 11 19 3 144 Wholesale and Retail Trade 53 250 275 320 290 62 48 1,298 Other 9 11 21 23 39 15 3 121 Total : 144 618 1,167 1,124 1061 305 142 4,561

Dependant variable: There is little agreement in the existing literature 1. on how to measure growth, and scholars have used a variety of different measures. For example: growth of sales, employees, assets, profit, • equity, and others (see Davidsson, & Wiklund, 2000). Following Heshmati (2001) we use three growth models – • with growth in sales revenues, employment and total assets as dependant variable. 2012 Annual Meeting of BMA, Sofia 10 12/10/12 April 22, 2012

Explanatory variables: The choice of explanatory variables is theoretically 2. driven and aims to proxy for firm specific characteristics that are likely to determine the growth of a firm (see Table 2): (1) Traditional determinants of age and size. (2) Macroeconomic variables: GDP per capita, inflation and corporate tax rate. (3) Firm specific characteristics: internal finance, capital structure, liquidity, factor productivity, future growth opportunities. 2012 Annual Meeting of BMA, Sofia 11 12/10/12 April 22, 2012