Recent Research: Older Firms Necessary for Job Growth

The SBA paper builds on research done by David Birch, who developed the concept of gazelle firms in the 1980s and 1990s. Birch defined gazelles as businesses that grow their revenues at least 20 percent each year in the preceding four years, starting from a base of at least $100,000. His research found that these firms are responsible for almost all job creation. Though these businesses are not necessarily young or old or small or large, they tend to be smaller and younger than other businesses. By Birch’s estimate, only one out of every 16 companies qualified as gazelles in any given time period. Birch contrasted gazelles with elephants, which have a large employment share but do not generate many new jobs, and mice, which start and remain small.

Acs et al. examine businesses in the mold of Birch’s gazelles, which they call “high-impact firms” -- enterprises that have doubled their sales over the previous four years and have an employment growth qualifier of two or more for the same period. This qualifier is equal to the product of the firm’s absolute change and its percent change in employment. The researchers examine three four-year periods, 1994-1998, 1998-2002 and 2002-2006. They take 1998-2002 as the primary focus of study and use the surrounding four-year periods to analyze what high-impact firms look like in the years before and after they attain high-impact status. Firms are divided into small, medium and large by number of employees to find out if Birch was correct in proposing that smaller, younger firms dominate job growth.

High-impact companies made up only 3.8 percent of all businesses during the time frame of the study. For the entire 1994-2006 period, small businesses represented a vast majority of high-impact firms. Firms with fewer than 20 employees made up almost 94 percent of this group. However, these firms were only responsible for 33.5 percent of job growth by high-impact firms. Businesses with 20 to 499 employees represented 24.1 percent of new jobs by this group and 500-plus businesses accounted for 42.4 percent. Somewhat counter to Birch’s findings, companies that were 10 years old or younger made up only 2.8 percent of high-impact firms. The average age was 25, and only 3 percent were created in the previous four-year period. High-impact firms were present in all categories and were fairly even across regions and metropolitan areas.

The researchers suggest that, in light of this data, local economic development organizations should put more effort into cultivating high-growth firms, rather than focusing exclusively on entrepreneurship. While high-tech start-ups can represent a future generation of high-impact firms and tend to create jobs outside the company itself through a multiplier effect, they are not producers of jobs in the short-term. By providing services to businesses on the cusp of a period of high-growth, TBED professionals can help firms take the next step to becoming a source of new jobs.