Various theoretical models have been developed to describe the growth of small businesses. Managers of firms learn about their efficiency when they are established in the industry. With firm age, the owner’s estimation of efficiency becomes more accurate, decreasing the probability that the output will differ widely from year to year.
In the active learning model, a firm explores its economic environment actively and invests to enhance its grow th. The prospective and actual growth changes over time in response to the outcomes of the firm’s own investment and other actors in the same marketplace.
According to this model, owners or managers could raise their competence through formal education and training that enhance their talents. Businesses run by entrepreneurs or managers with higher formal education and training would therefore be anticipated to grow faster (Bekele, 2009).
A second set of growth theories includes the stochastic and deterministic perspectives. the stochastic theory ,which is also known as Gibrat’s law,argues that all changes in magnitude are the result of chance(Mullei 2003:296-307).
Thus, the size and age of the firms has no effect on the growth of small enterprises.
Empirical test of the law are indicated by considering the size and age as potential variables while neglecting other explanatory variables that may significantly affect firm growth(Evans 1987a: 126-147;Gurmeet and Rakesh 2008:301-302). The deterministic method, on the other hand, assumes that variations in the rate of growth across firms depend on a set of observable industry and firm specific characteristics (Pier 2002:83-94; Solymossy and Penna 200:99-114).
The industrial organization model (I/O) explains the external environment’s dominant influence on a firm’s strategic action (Hitt,Ireland and Hoskisson 2009: 67-76). The industrial organization model stipulates that the industry in which a firm chooses to compete has a stronger impact on performance than the choices of managers to type inside their business.
The firm’s performance is a function of primarily a range of Facility, such as finance, training and access to market and other business development services (Hullberg 1999: 104; Harding 2002: 76-78: Jennings and Beaver 1997:209-210; et al. 2008: 65-86: Wole 2004 80-95). This theory specifies that a firm
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