The Determinants of Growth in the Information and Communication Technology (ICT) Industry: A Firm-Level Analysis

Why do some firms grow faster than others? This question has become the focus of a large number of empirical studies in industrial organization, strategic management, and entrepreneurship since the publications of Gibrat (1931) and Penrose (1959). Using an unbalanced panel data set of 85 U.S. information and communication technology (ICT) firms that survived over the period from 1990 to 2013, we examine the effect of firm size, agency costs, R&D investments, capital structure, profitability, and the Great Recession of 2007-2009 on firm growth. Adopting the two-step, system, generalized-method-of-moments estimator for linear dynamic panel models (Blundell and Bond, 1998), we document that growth in the ICT industry is not stochastic, as predicted by Gibrat (1931), but driven by systematic factors. We find compelling evidence that in the ICT industry: (i) firm growth exhibits positive persistence, which endorses the controversial "success-breeds-success" evolutionary hypothesis; (ii) agency costs and financial leverage exert a negative effect on firm growth; (iii) R&D investment and financial performance generate a positive effect on firm growth; (iv) the Great Recession (2007-2009) produced a negative effect on firm growth; (v) a nonlinear, inverted U-shaped relationship exists between firm size and firm growth; and (vi) Gibrat’s law does not hold. Our findings remain robust to transformations using first differences and forward orthogonal deviations as well as principal components reductions. These results are new to the literature, since the dynamics of firm growth has not been documented at the ICT industry level. Noteworthy policy implications emerge because the growth dynamics of the ICT industry move this sector toward more concentration and less competition.