The impact of types of firm growth on selected macroeconomic aggregates

This paper is founded on the belief that empirical evidence on firm growth prior and after an economic crisis allows the identification of distinct groups of growing firms and the investigation of their role and impact on macroeconomic aggregates at various stages of the economic cycle.

According to microeconomic theory, firms grow when their profitability increases due to output and input adjustments made to attain the short- or the long-run firm equilibrium. In the short run, when at least some production factors remain fixed, there is no possibility to modify all available factors of production concurrently and thus fully adjust the firm size to optimise the firm’s operations to maximize its profitability. In the short run, the firm can thus to some extent modify the scale of its activities but it cannot alter its size. In long-term analysis, on the other hand, no fixed factors are assumed, implying that the quantity of all production factors can be changed. In the long term, the firm’s optimal level of output can thus be modified by upward or downward alterations in the quantity of all employed inputs, which technically implies a different size of the investigated firm. The described approach to firm growth enables the authors to develop a novel typology of growing firms. Such a new typology of growing firms also enables the authors to investigate how firm growth and in particular the types of firm growth change as economic growth fluctuates.

Companies are allocated to different groups based on growth rates of employment, capital, sales, and profitability. By observing firm growth at various stages of the economic cycle the authors can investigate how characteristics of growing firms change as the economic growth fluctuates to determine their role in reviving and boosting economic growth. The authors thus study how firms with different types of growth impact key macroeconomic aggregates: GDP, employment and investments. They attribute the growth of specific macroeconomic aggregates to certain types of firm growth that prevail at various stages of the economic cycle. The authors assume short-term firm growth has a stronger impact on employment and GDP growth especially in times of less favourable economic conditions, while long-term firm growth is characteristic for periods of economic expansion when investment growth plays a vital role in stimulating economic growth.