Although there is some support in the data for hypothesis 3, it appears that for young growing firms, any diversification produces more growth than no diversification. A caveat is that vertical integration and unrelated strategies do not seem to produce spectacularly large firms, while some single business firms have grown to large size without diversifying.
The hybrid related/vertical strategy, typically adopted by low technology firms in fragmented industries (food, clothing) is an interesting and unexpected feature of the results, and appears in all three nations. What appears to be happening in these exciting firms (several of which now employ several thousand employees) is that the entrepreneur develops a new concept of his industry, rewriting the rules of the game, and turns what was a fragmented craft industry into a coordinated marketled business, integrating subsupply, product development, state of the art manufacturing, and distribution.
Examples of this diversification strategy include Brioche Pasquier, which industrialised the French patisserie industry, Le Duff, which industrialised fast food; Bacou, which moulded many small French clothing and footwear subsuppliers and distributors into an integrated safety workwear corporation (now quoted on NASDAQ), and Poldys, which evolved from a frozen pizza maker to the major Irish frozen food manufacturing and distribution group. The growth mode of these firms has been similar: organic growth coupled with acquisitions.
There is some support in the data for hypotheses 4 and 5. Acquisition as a growth mode seems to be more popular and to produce more growth in older firms, and in low and medium technology firms rather than hightechnology firms. This seems logical: older firms have more slack resources to support an acquisition, while hightechnology firms may be in either very specialised niches or in markets which are growing so fast that all of managements time is focused on growing the single business. Lowtechnology firms on the other hand may be in lower growth markets, where growth in sales may only come from buying another companys sales or creating synergies from integration.
The striking difference between France and Ireland on the one hand and Scotland on the other with respect to the rate of spawning of daughter firms may have its roots, at least in part, in government regulations. In Ireland in the 1970s and 1980s, certain firms which exported the bulk of their products enjoyed total exemption from corporation tax. This encouraged firms to set up separate exporting companies. Then the system was changed, and manufacturing companies benefited from a reduced 10% rate of corporation tax. Manufacturing subsidiaries were then created to exploit this.
In France, there were different reasons for spawning daughter firms. One of these was industrial democracy legislation, which required entrepreneurs to set up enterprise committees with representatives of their workforce who could seek commercial information and influence the running of the firm, once the firm employed 50 or more people. A typical reaction to this was to set up new firms to run functions previously organised within the original firm once it grew close to the 50 employees figure. Indeed, the proportion of young growing firms in France employing 50 to 55 people, at 10% is much lower than the proportions in Ireland (27%) or Scotland (30%).
In comparing the two cohorts of Irish and Scottish young growing firms, which were 5 years apart but roughly equal in population size, the differences in diversification strategy continue from cohort to cohort. However, the amount of diversification activity appears to decline in Scotland and increase in Ireland. The numbers are small, which urges caution in seeking definite patterns, but differences in business cycles between Ireland and Scotland may account for this. In 1987, Ireland was in recession while Scotland was benefitting from the UK boom. In 1992, Scotland was suffering from the UK recession while Ireland was recovering rapidly. The decline in median firm size in Scotland over the 5 year period, and the increase in Ireland, also supports this explanation. We can conclude that the pace of growth of young growing firm populations may be affected by general economic conditions, even if individual young growing firms appear to expand regardless.
Further work needs to be done on a pattern of growth that has been ignored in this paper: the pattern of internationalisation. Although related diversification appeared virtually absent from Scotland, a large minority of the Scottish young growing firms were growing internationally by replicating themselves in other world oil centres. Others were replicating themselves in the world electronics production centres. Many French and Irish firms had overseas sales and production subsidiaries, while others exported the vast majority of their product. Tracking the internationalisation of these young growing firms is the next task in this long term study.
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Last Updated 06/01/98