The Determinants of growth for small and medium sized firms: the role of the availability of external finance

We present an empirical analysis on the determinants of growth for a sample of Italian small and medium sized firms. We show that, when investigating a sample which includes firms between 10 and 50 employees and a set of variables larger than those usually considered in the literature, growth - net of industry characteristics and ex ante market power - turns out to be significantly affected not only by size and age, but also by state subsidies, export capacity and credit rationing. By adopting a multivariate approach we also show that these findings are robust to problems of heteroskedasticity, survivorship bias and serial correlation traditionally considered by this literature. Our results suggest that the hypothesis of independence of firm growth from the initial size and other factors (usually called Gibrat’s law in the literature) is not rejected when financial markets are well developed, while it does not hold for small and medium sized firms under financial constraints in a "bank-oriented" financial system in which access to external finance is difficult.