Growth intention and variance of firm growth rates

Abstract

Principal Topic Why some companies grow, and others do not? Answering this question has been one of the main tasks for entrepreneurship researchers (Audretsch et al., 2014; Gilbert et al., 2006; McKelvie & Wiklund, 2010). Differences in managerial motivation is one explanation for varying growth rates in entrepreneurial firms: variation among human motivation and abilities to act has been claimed to have important effects on all phases of the entrepreneurial process (Tominc & Rebernik, 2007), and this relates to the actual firm growth (Delmar & Wiklund, 2008). On a more general level, motivation and the effort that an entrepreneur intends to make have been referred to as growth intentions (Hermans et al., 2015) or growth orientation when examined on a firm level (McKelvie et al., 2017). However, the empirical evidence shows that the magnitude of effects of various motivational constructs ranges from small to medium at best (Levie & Autio, 2013; McKelvie et al., 2017). This fairly weak relationship presents a puzzle: intention is one of the key determinants of human action and owner-managers should have agency over their firms. Based on these considerations, the growth intention of an owner-manager should have a strong impact on firm growth. To explain this disconnection between theory and empirical evidence, researchers have proposed that managers might have limited volitional control over firm growth (Delmar & Wiklund, 2008) or that the relationship between intention and growth is complex and distant and thus not well-captured by a linear, direct effect (Levie & Autio, 2013). In this paper, we develop a two-part argument regarding how growth intention affects growth. First, we argue that the higher growth intentio the better probability of higher growth. This argument is consistent with motivational theories applied in prior research. Second, we also argue that high growth intention increases firm’s probability of failure by lacking growth or even declining over time. The key rationale is that aiming for high growth necessarily increases the risk level (Sapienza et al., 2006) and may lead to sacrificing profitability (Davidsson et al., 2009). By considering these two processes that produce opposite outcomes, we hypothesize that the linear effect of growth intention on expected growth is weak or non-existent at best, but that growth motivation increases the variance of growth outcomes. Thus, growth motivation should be viewed as a necessary but insufficient condition (Dul, 2016) for growth. Altogether, while firms lacking intention to grow are less likely to develop (Levie & Autio, 2013, p. 9), increasing growth intention is insufficient for increasing the growth rate but can also have an opposite effect. Method We test the relationship between growth intention and growth using longitudinal, annually collected survey data from 2,243 small and medium-sized Finnish IT companies (NACE codes 6202 and 6201). We measure growth intention by a self-constructed scale with eight five-point Likert questions, developed from existing literature and piloted with several managers from the study sample. The questions are similar to the ones used by McKelvie et al (2017) and reflect the importance of growth in general, risk resilience for growth achievement and intentions for international expansion. The survey provided us with 4,221 observations collected between 2007-2016. Growth was operationalized as relative change in revenue using one and three-year changes, obtained from Orbis database with almost complete revenue history available for the sample up to 2019. Prior studies, demonstrating a clear linear relationship between growth intention and growth, suffer from two endogeneity problems. First, growth and growth intention are likely to form a feedback loop (Delmar & Wiklund, 2008), that cross-sectional designs do not capture. Second, those studies that apply longitudinal datasets and estimate cross-lagged models, ignore the possibility of unmeasured stable between firm differences, such as the quality of opportunity or initial resource endowment, that are likely to affect growth intention and firm growth causing a spurious correlation; this is a general problem with cross-lagged models (Hamaker et al., 2015). To address these concerns, we start by analyzing our data with cross-lagged random intercept models that simultaneously take in to account both problems explained above (Hamaker et al., 2015; Zyphur et al., 2019). Thereafter we test our variance hypothesis using location-scale models (McNeish, 2020) and by graphical means. To account for missing data in our unbalanced panel, we apply FIML estimation. Results and Implications The preliminary results show that past growth has a positive and statistically significant effect on growth intention and growth intention has a statistically significant and positive effect on future growth, supporting the existence of a feedback loop. Yet, the effects are fairly small and random intercepts for the variables are correlated. Thus, at least partly endogeneity can explain positive correlations found between growth and various operationalizations of growth intention or its dimensions in previous studies. More interestingly, the preliminary analysis shows that while the mean growth rate (expected value) is weakly affected by growth intention, the effect of growth intention on the variance of growth rate, i.e. the prevalence of both extreme positive and negative outcomes is much more pronounced. Additionally to some earlier studies about firm growth being performed with low accuracy (Wright & Stigliani, 2013), there are available research questions concerning firm growth decisions, modes, patterns and reasoning that have received insufficient attention (Clarysse et al., 2011; Iacobucci & Rosa, 2010). This paper contributes to ongoing entrepreneurship research conversations by explaining why relying on growth intention in forecasting growth rates is ineffective solution, which obliterates problems of endogeneity. Our conclusion that increasing willingness or intention to grow a firm only weakly influences on the subsequent growth rate carries value for managers in those companies that intend to grow: they should reconsider the way and the key components of growth to invest in.