Corporate Growth: the Determinants, Means and Directions of Company Expansion

Abstract

This study is designed to provide an understanding of what the objectives of firms' operations are. In particular, it is a study of company growth and what "company growth" means (See Appendix One), what the determinants of company growth are, etc. More specifically, the study is an attempt to empirically research company performance in order to place emphasis on company growth so that a complete theory of company behaviour (or performance or objectives) can be developed. The need for such a study arises because of defects associated with past treatments of companies and their objectives and performance traits. The neo-classical economists' theory of the firm, the most developed corporate theory, is defective. This has been recognised to an increasing degree and new theories have attempted to replace the neo-classical theory. New theories have been concerned with particular aspects of firm behaviour usually management, objectives of behaviour, or corporate dynamics. However, the treatment of the later aspect of company performance has been sparse and often associated with the study of other, so called "paramount", factors associated with firms' operations. This study attempts to place emphasis on corporate growth. It attempts to answer such questions as: 1. is big business becoming bigger? 2. why does Company XYZ have a growth in profits or size of 2% while Company BZN has growth of 39%? 3. have acquisitions, mergers, etc. lead to increased industrial concentration and how much importance is placed on these methods of growth? 4. is it desirable to control company size and growth, etc? 5. how will companies grow in the future? The study concludes that there are three determinants of a company's growth rate. (a) The Desire to Expand (Chapter One). The objectives of company operation, as determined by the entity's management, will determine whether the company deems expansion part of the company's objective. (b) The Opportunity to Expand (Chapter Two and Chapters Three to Nine). The existence of growth possibilities for the particular entity. These possibilities will depend on managerial ability to some extent. It is management which must recognise growth opportunities. (c) The Means to Expand. (Chapter Two and Chapters Three to Nine). Unless additional finance and other resources are obtained, then the desire and the opportunities to expand will not lead to growth. Tied in here is the importance of management and in particular, management's involvement in acquisitions. This study is based on strict empirical evidence for the New Zealand listed manufacturing companies over the period 1960-70 inclusive. The actual companies analyzed are detailed in Appendix Two. The effects of past growth, profitability, management, acquisitions, industrial effects, company age and financial policies on company growth are all analyzed. The data for this analysis is derived from the annual published statements of these companies. Much of the study is directly dependent on theoretical economics and economic problems. These are problems which have received a lot of attention over the last two decades from theoretical economists. The finer points of theoretical argument are ignored in this study. The aim of the study is to present empirical data in a readable form. Because of this, discussion on theoretical problems and issues was superficially conducted. The author was loth to get submerged in theoretical arguments and descriptive details. In many cases the broad generalisations which were drawn from theoretical economics, mainly the theory of the firm, may have led to some inadequacies in this study from a theoretical point of view. To overcome this recognised defect, an adequate bibliography is included with relevant references being presented in each chapter. In order to present the analytical results in a compact form it was not only necessary to eliminate most of the theoretical discussion but also to ensure that the conceptual difficulties which arose, and there were many, were presented outside the main text. Much of the data concerned with conceptual problems is presented in Appendix One or in relevant footnotes. In addition, many of the conceptual problems could not be solved because of the lack of data on company and industrial performance. It was necessary to make some bold assumptions to get over these defects in data. Consequently the analytical techniques used in this study were not in any way exhaustive. Broad generalisations have been drawn from the empirical data rather than precise conclusions. The study itself is likely to be of benefit to a number of groups associated with firm operations and activities. The empirical data presented does fill a gap in the available data on the theory of the firm, but there are also strong implications for other groups, including shareholders, management, Government, accountants, etc. The implications which directly arise from this study are presented in Chapter Ten. Readers wishing to obtain an understanding of the importance of growth as a company objective without wishing' to read the entire text can restrict their reading to Chapters 1, 2 and 10.