Determinants of growth and profitability in small entrepreneurial firms

Abstract

Using accounts data for a sample of 38 small manufacturing firms located in Tayside Region, this paper investigates the relationship between company characteristics including size, age, location and industry group, and profitability and growth. The trade‐off between the possibly conflicting objectives of profit and growth is considered primarily from the entrepreneurial rather than the managerial standpoint which previous econometric studies of small firm performance have concentrated on. Motivations for undertaking entrepreneurial activity and their possible relationships with profitability and growth are discussed and a number of hypotheses developed. From this perspective it is argued that a firm size measure based on employment is more appropriate than one based on sales or assets which previous studies have used. Firm characteristics are found to be of limited value in explaining profitability. However, larger firms are found to grow faster than smaller, and younger firms are found to grow faster than older. This is also some evidence that growth is stronger in urban than in suburban or rural locations. It is possible that entrepreneurial motivations are an important factor in this regard and it is suggested that future econometric studies of small firm performance take these into account.