High-growth SMEs versus non-high-growth SMEs: a discriminant analysis

Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=tepn20 Entrepreneurship and Regional Development ISSN: 0898-5626 (Print) 1464-5114 (Online) Journal homepage: https://www.tandfonline.com/loi/tepn20 High-growth SMEs versus non-high-growth SMEs: a discriminant analysis Ana M. Moreno & José C. Casillas To cite this article: Ana M. Moreno & José C. Casillas (2007) High-growth SMEs versus nonhigh-growth SMEs: a discriminant analysis, Entrepreneurship and Regional Development, 19:1, 69-88, DOI: 10.1080/08985620601002162 To link to this article: https://doi.org/10.1080/08985620601002162 Published online: 13 Feb 2007. Submit your article to this journal Article views: 2933 View related articles Citing articles: 26 View citing articles ENTREPRENEURSHIP & REGIONAL DEVELOPMENT, 19, JANUARY (2007), 69–88 High-growth SMEs versus non-high-growth SMEs: a discriminant analysis ANA M. MORENO and JOSE ´C. CASILLAS Departamento de Administracio ´n de Empresas y Marketing Universidad de Sevilla, Avda. Ramo ´n y Cajal 1, 41018 Sevilla, Spain; e-mail: [email protected]; [email protected] The purpose of this paper is to analyse the main variables that allow one to distinguish between high-growth firms and non-high-growth firms. Theoretically, we discuss such differences through a combination of economic (external approach) and strategic (internal approach) visions. Empirically, this paper provides two differences with regard to previous literature: (1) the primary goal of our work is not to provide an outright explanation of firm growth; rather, we aim to establish what characteristics enable us to distinguish between high-growth and non-high-growth firms. This aspect determines the methodology used (discriminant analysis with dichotomic dependent variable); and (2) firm high growth is understood as an extraordinary growth in comparison with the average growth of other firms in the same industry, and not in absolute terms. The results show that in the main high-growth firms are different from moderate-growth firms or declining firms because of their smaller size (which is contrary to Gibrat’s Law), their higher availability of idle resources (consistent with the theory of resources and capabilities), and in some cases, their lower availability of financial resources (consistent with the existing literature on entrepreneurship). Keywords: high-growth firms; gazelles; entrepreneurship; discriminant analysis. 1. Introduction Several reasons explain the expanding interest in understanding and analysing the determinants of growth within small and medium-sized enterprises (SMEs), especially as regards the so-called high-growth firms. Various studies uphold that these firms are the ones that generate more new jobs in net terms (Birch et al. 1994, Littunen and Tohmo 2003), and that rapid growth is an indicator of the firm’s overall success (Fisher and Reuber 2003). The need to generate new business ventures and initiatives (whether or not they involve new firms) explains the extensive literature on entrepreneurship. However, these new entrepreneurs will not contribute much to the social and economic developments of their environment if, within a few years, they fail to reach a size that allows them to face the challenges derived from today’s intense international competition with a certainty of success. Many research papers have recently highlighted the need to distinguish between the general phenomenon of growth, and the particular ‘high-growth’ (Smallbone et al. 1995, Delmar et al. 2003, Barringer et al. 2005). High growth tends to be associated with a firm’s entrepreneurial behaviour (Stevenson and Jarillo 1990, Brown et al. 2001), and high-growth firms prioritize growth over profitability. Entrepreneurship and Regional Development ISSN 0898–5626 print/ISSN 1464–5114 online ß2007 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/08985620601002162 First, high-growth firms are usually identified without taking account of existing differences in growth rates among different industries. In this way, most empirical works consider that a firm grows rapidly when it is able to double its initial size within a short period of time, normally 4 years (Littunen and Tohmo 2003). Similarly, economic approaches to growth tend to focus only on the validity of the well-known Gibrat’s Law, according to which a firm’s growth is irrespective of its size, and on how firm age influences such relationships (Almus and Nerlinger 2000, Bechetti and Trovato 2002, Correa et al. 2003). On the other hand, unlike the aforementioned external approaches, the theory of resources and capabilities provides an endogenous explanation of firm growth, according to which firm growth can be explained through the existence of excess resources that the firm seeks to put to use (Penrose 1959, Pettus 2001). Excess resources arise because of their indivisibility, which forces the firm to acquire larger quantities than it actually requires. In keeping with previous studies (Wiklund 1998), this paper addresses both internal and external characteristics to explain the differences between high-growth and non-high-growth firms. There is no agreement as to the definition of high-growth ventures. Thus, according to Storey (2001), high-growth firms are firms that have achieved a sales growth of at least 25% in each of the 4 years for businesses with current sales of £5–10 million, or of at least 15% for businesses with current sales amounting to £10–100 million. According to the National Commission on Entrepreneurship (2001), rapid-growth firms are firms with an increase in headcount by at least 15% per year. According to Birch et al. (1994), high-growth firms are firms with sales growth of at least 25% per year. Finally, other studies use different, albeit similar, indicators (Moreno and Casillas 2000, Barringer et al. 2005). For the purposes of this paper, high-growth firms are firms that are able to grow more rapidly than the other firms in the same industry group. In this sense, this paper shows three differences with regard to the existing literature. First, our primary goal is not to provide an outright explanation of firm growth, but to determine what characteristics enable us to better differentiate between highgrowth firms and non-high-growth firms. This is all the more important when it comes to designing the methodology that best suits our goal (Davidsson and Wiklund 2000), especially as to the nature of the dependent variable to use (dichotomic versus continuous), and the type of statistical model to apply (discriminant analysis versus regression analysis). Second, firm’s high growth is understood as an extraordinary growth in comparison with the average growth of other firms in the same industry, and not in absolute terms. High growth can therefore be considered irrespective of the life cycle of the industry to which the firm pertains. Finally, our conceptual approach combines the economic (external approach) and strategic (internal approach) visions to explain the differences between high-growth and non-high-growth firms. In sum, the main contributions of this paper are the following: (1) Gibrat’s Law is challenged through empirical research based on a large sample of SMEs; (2) the present research takes into account the industry influence on growth rates, not by computing industry dummies (as in previous research), but by defining highgrowth firms in relation to the industry in which the firm operates; and (3) highgrowth firms are compared not only with a unique category of non-high-growth SMEs, but with different categories of non-high-growth firms (classified by their different growth rates). 70 ANA M. MORENO AND JOSE ´C. CASILLAS The paper is organized in six sections, including the introduction and the conclusions. The second section outlines the theoretical foundations for the selection of the variables that explain the differences between high-growth and non-high- growth firms; it proposes four hypotheses as to size, age, financial structure and existence of idle resources in the firm. The third section describes the methodology used, and includes the description of the data source and the refinement process used to get a final sample of nearly 6700 SMEs, the measurement of both the dependent and independent variables, and the statistical method employed. The results are summarized in section 4, and analysed in section 5. Finally, section 6 draws the main conclusions, addresses the limitations of the study, and points to avenues for future research. 2. Literature review and hypotheses 2.1 Theoretical background From the middle of the 1990s, many studies have examined high-growth firms (Birch et al. 1994, Bidhe 2000, Storey 2001, Barringer et al. 2005). More interestingly, since these firms generate a large number of new jobs (Storey 1984, Birch et al. 1994, Barkham et al. 1996). For instance, in the USA, these highgrowth ventures account for approximately 70% of the total increase in the employment rate in recent years (Birch et al. 1994). Based on previous literature (Bidhe 2000, Storey 2001, Barringer et al. 2005), we take as a starting point the idea that high-growth ventures are a particular type of business, which are substantially different from the other businesses (Davidsson and Delmar 1997). This is no new idea, as it was already addressed in previous works of Birch et al. (1994) on ‘gazelle’ firms, Storey (1994) on 10 percenters and Bidhe ´(2000) on the Inc 500 companies, etc. (Moreno and Casillas 2000, Barringer and Jones 2004, Barringer et al. 2005). Moreno and Casillas (2000) state that high-growth enterprises show two main characteristics: (1) they experience a strong growth in size, which in most cases leads them to increase by as much as twice their initial dimension; and (2) this strong growth is concentrated in a very short period of time, which ranges between 4 and 5 years (irrespective of what indicators have been used to measure this growth rate, i.e. sales growth, duplication of employees, etc.). The large magnitude of growth means that we can consider it as a pivotal change, and a revolution (insofar as it is a non-gradual evolution) in the organizational life of the enterprise. This rapid growth can occur under two different circumstances. First, it can be a new venture. In this case, the company is in a process of searching for a minimum size that favours its survival (Barkham et al. 1996). What is especially relevant is the case of entrants created with a view to exploiting a new technological/marketing opportunity that has been neither detected nor met by other firms – entrepreneurial firms (Bidhe ´2000). The second circumstance concerns existing enterprises (firms with a history). The growth of these enterprises is derived from a change in their strategies, actions, behaviour, etc. These dramatic changes allow for the rapid concentrated growth of the firm. This situation is a clear example of strategic renewal (Markides 1998). In order HIGH-GROWTH VS NON-HIGH-GROWTH SMES 71 to grow the company has to reshape its product-market position, and modify the structure of resources and capabilities developed so far. This kind of rapid, high growth involves a dramatic change, a qualitative shift in a firm’s evolution, like those defined by Tushman and Romanelli (1985) – punctuated equilibrium – or Miller and Freiesen (1984) – quantum structural change. Many different theories have attempted to identify the main factors underlying firm growth. They can be divided into two main schools: the first addresses the influence of firm size and age on growth, while the second deals with the influence of variables such as strategy, organization and the characteristics of the firm’s owners/ managers. The first approach has examined the impact of firm size on growth through the well-know Gibrat’s Law (1931). Nevertheless, the empirical results are very confusing: while some works do find a positive relationship between the variables (Samuels 1965, Prais 1976, Acs and Audretsch 1990), the majority of investigations identify a negative relation (Dunne and Hugues 1994, Bechetti and Trovato 2002). In contrast, other works suggest that the relationship between size and growth depends on the size measure considered (Mansfield 1962, Hart and Oulton 1996, Gonza ´lez and Correa 1998, Correa et al. 2003). In keeping with the above, the Theory of Learning has tried to explain this rejection by adding new factors such as firm age and industry (Jovanovic 1982). Nevertheless, over the last few years, various authors have attempted to find statistical regularities (Sutton 1997, Caves 1998), and have analysed if the contradictions found in the extensive existing literature are due to the need for adding further explanatory dimensions or to methodology issues (McCloughan 1995, Bechetti and Trovato 2002). These empirical models, however, pay little attention to the causes that justify size influence on growth. It is precisely in this sphere that other approaches can provide new explanations. This is the case of the resource constraints literature (Baker and Nelson 2005) and the slack resources argument (George 2005). Resource constraints literature states that firms with fewer resources are likely to leverage them more efficiently, and because of this, most entrepreneurial private firms have higher growth rates than other firms (Baker and Nelson 2005, George 2005). The slack resources argument proposes that slack resources influence performance because slack provides that cushion of actual or potential resources that allows an organization to adapt successfully to internal pressures for change as well as to initiate changes in strategy (George 2005: 663). Both arguments are consistent with the combination of entrepreneurial and resource-based views of the firm (Penrose 1959, Wernerfelt 1984, Barney 1991). The resources-based view of the firm suggests that a firm can be seen as a set of resources and that business growth can be explained through the availability of idle resources (Penrose 1959). Such idle resources arise as a consequence of their indivisibility, which forces the firm to acquire larger quantities than it actually requires. If a firm is entrepreneurial, the existence of these resources promotes firm growth (Penrose 1959). In this way, firm growth can be understood as a sequential process in which the firm combines new resource exploitation with new resource development (Pettus 2001). Also, it can be observed that the smaller the firm, the greater the indivisibility of resources and, as a consequence, the availability of slack resources. In fact, resources are available in discontinuous quantities in the marketplace, so smaller firms are more encouraged to grow, in order to reach their optimal size. 72 ANA M. MORENO AND JOSE ´C. CASILLAS Therefore, we will propose a series of hypotheses related to the influence of four types of high-growth explanatory factors: (1) firm size; (2) firm age; (3) availability of financial resources; and (4) existence of slack (non-financial) resources. 2.2 Firm size As it has been previously stated, the simplicity of Gibrat’s Law (1931) or the Law of Proportionate Effect, according to which the growth rate of the firm is irrespective of its size, has favoured the development of an extensive empirical literature, which uses different methodology and various samples in different countries, such as Sweden (Davidsson et al. 2002), Italy (Bechetti and Trovato 2002), Japan (Wijiwardema and Cooray 1995, Goddard et al. 2002), Austria (Weiss 1998), Australia (Wijiwardema and Tibbits 1999), UK (Dunne and Hugues 1994, Storey 1994), Finland (Littunen and Tohmo 2003), the USA (Evans 1987, Friar and Meyer 2003), Germany (Harhoff et al. 1998, Almus and Nerlinger 2000) and Spain (Farin ˜as and Moreno 1997, Correa et al. 2003). Despite their contradictory results, the majority of works tend to reject the basic postulates of Gibrat’s Law (1931), in such a way that smaller firms seem to exhibit higher growth rates than their larger counterparts (Evans 1987, Wagner 1992, Dunne and Hugues 1994, Reid 1995, Weiss 1998, Bechetti and Trovato 2002, Goddard et al. 2002, Correa et al. 2003). Nevertheless, other works either find a positive relationship between both variables or fail to find any relation at all (Samuels 1965, Prais 1976); finally, other studies suggest that the influence of size on growth depends on the size stratum under study. Thus, works such as those of Mansfield (1962), Hart and Oulton (1996), and Gonza ´lez and Correa (1998) seem to point that, for small and mediumsized companies, Gibrat’s Law does not appear to be valid. Nevertheless, from a given level onwards, size and growth do not seem to be connected. These analyses usually apply a methodology that consists in dividing the samples into different size strata, and then studying the existing size-growth relationship for each individual stratum on the one hand, and between the different strata, on the other (Correa et al. 2003). Nevertheless, more important than the results is determining why size can – or cannot – be an explanatory factor of firm growth. Most of the authors who have found a negative relation between both variables hinge on the idea that small firms pursue growth as a means to reach a minimum efficient size (Correa et al. 2003). Thus, firms, when small, want to grow in order to attain higher levels of efficiency and competitiveness, which are normally linked to larger firms (McCloughan 1995). In this regard, economies of scale may play an important part in explaining small firm growth. In this connection, Penrose (1959) underlines that small firms need to grow in order to be able to take full advantage of existing idle resources and capabilities. This idle capability therefore constitutes an incentive to grow (Penrose 1959) in such a way that, as it was mentioned above, it seems reasonable to say that the indivisibility of assets, at least proportionately, has more implications on smaller firms than on their larger counterparts. All these reasons should explain the lack of validity of the independence between size and growth advocated by Gibrat (1931), and based on this premise we can make the following hypothesis: Hypothesis 1: There are size differences between high-growth firms and non-high- growth firms, in such a way that the former will be smaller than the latter. HIGH-GROWTH VS NON-HIGH-GROWTH SMES 73 2.3 Firm age For decades, firm size and age have been considered to be the determinants of firm growth. Two theories support this idea. On the one hand, the Theory of Learning (Jovanovic 1982) puts the stress on the part played by organizational learning, through the firm’s managers, in the making up of perceptions and expectations relating to the best performance of the firm. Jovanovic’s (1982) model proposes that younger firms will have higher growth rates, as they have less understanding of the costs related to their activities and of how these change with the passage of time. For this reason, younger firms will exhibit much more variable growth rates, while older firms, as they know the optimal size that allows them to maximize their levels of efficiency, will show fewer size changes (Farin ˜as and Moreno 1997). A similar argument is proposed by Shafman et al. (1988) when they stated that young firms tend to be resource-constrained and to suffer from ‘liability of newness’. Therefore young firms are likely to make less efficient use of resource slack than older firms, because older firms have had the opportunity to experiment with different types of resources and select the ones that best fit their demands (George 2005). Various empirical studies seem to support this negative relation between firm age and size (Evans 1987, Dunne and Hugues 1994, Farin ˜as and Moreno 1997), although other recent works state that the influence of firm age depends on the size stratum of the firm (Correa et al. 2003). On the other hand, literature on the entrepreneurship view of the firm tends to assume a negative relationship between age and entrepreneurial orientation of the firm (Lumpkin and Dess 1996, Lumpkin 1998). Young firms are more innovative, proactive and risk-orientated than older firms, among other reasons because young firms emerge with the purpose of taking advantage of a new opportunity, previously unexploited, by means of an innovating, proactive, and somewhat risk-taking behaviour (Shane and Venkataraman 2000). Furthermore, young firms are more flexible and have developed fewer rigid routines than older firms. This allows them to discover and exploit new growth opportunities than older firms. Both the Theory of Learning and the entrepreneurial models coincide at proposing a negative relation between firm age and growth, which can be extrapolated to the case of high-growth firms. For all of the reasons set forth above, we propose the following hypothesis: Hypothesis 2: There are differences in age between high-growth firms and non-high- growth firms, in such a way that the former will be younger than the latter. 2.4 Financial structure Although the financial structure of SMEs is an essential point to understand their behaviour (Reid 2003), few works have examined the relationship between availability of financial resources and firm growth (Harrison et al. 2004). Different theoretical and empirical arguments support the existence of a relationship (whether of a negative or of a positive nature) between the availability of financial resources and the growth rate of the firm. Most of the works on growth in small and medium-sized firms consider that the accessibility to sufficient financial sources is either a handicap or a brake to growth (Bechetti and Trovato 2002). 74 ANA M. MORENO AND JOSE ´C. CASILLAS According to the literature on the financial constraints of entrepreneurial activity, the lack of financial resources negatively affects both the self-employment choice of individuals and the growth of new firms (Holtz-Eakin et al. 1994, Cooley and Quadrini 2001, Cabral and Mata 2003). From this perspective, as firms need financial resources to be able to grow, those that are less likely to receive funds will grow more slowly. According to the resource and capability-based approach, the financial resources are fully divisible and transferable. Therefore, if resources exist but are not fully utilized, they can be used to grow, either within the same business or in other activities (Penrose 1959). In this regard, Bechetti and Trovato (2002), in a recent study based on more than 5000 Italian SMEs, found that, although the financial structure does not seem to influence the growth rate of firms with more than 100 employees, the availability of financial resources in smaller firms is a determinant to explain their growth. Entrepreneurial high-growth firms are characterized for being capable of raising funds to finance their growth decisions (Harrison et al. 2004). In this regard, Brown et al. (2001) uphold that entrepreneurial-oriented firms are also growth-oriented, and that they focus more on opportunities than on the efficient use of their resources. In other words, entrepreneurial firms identify the opportunities, decide to exploit them, and seek the necessary resources to do so. Growth requires substantial financial resources, so rapid-growth firms are typically cash starved. For this reason, we propose the following hypothesis: Hypothesis 3: There are differences as to the availability of financial resources between high-growth firms and non-high-growth firms, in such a way that the former will have a higher availability of financial resources than the latter. 2.5 Slack resources (non-financial) According to Penrose’s theory (1959), growth can be explained in terms of the existence of useless resources in the firm, which – because of their indivisibility – have been acquired in higher quantities than those actually needed. To the resources available at the marketplace in discontinuous amounts, we should add the amounts that are different for each one of the resources that the firm requires. These slack resources are the main incentive for growth. The firm’s wish to grow is explained because that firm tries to put these resources to use, thus enhancing its efficiency. Furthermore, the existence of specific slack resources will foster growth within the same industry, while the availability of general resources will enable growth in industries other than the traditional field of activity of the firm (growth via diversification). Penrose (1959) distinguishes between tangible resources (whether physical resources, usually indivisible, or fully divisible financial resources), and intangible resources (among which the human and managerial resources are to be highlighted). Recently, George (2005) analyses the influence of slack resources on performance of privately-held firms. Slack is a potentially utilizable resource that can be diverted or redeployed for the achievement of organizational goals. Slack enhances experimentation and risk-taking (Nohria and Gulati 1996), may insulate the firm from exogenous shocks (Thompson 1967), and provides more flexibility for managers to develop strategic options – managerial discretion – (Bourgeois 1981). As George (2005) states, HIGH-GROWTH VS NON-HIGH-GROWTH SMES 75 if managers perceive that their absolute level of slack far exceed those of competitors, they are likely to be more optimistic about courses of action. This optimistic view of the firm probably influences their growth decisions. Most works on growth do not even consider the existence of idle resources for two main reasons. First, because the stochastic approaches predominate in growth analyses. Second, because it is difficult to have information on the existence of idle resources, when the main data source is based on the annual accounts of the firms. Nevertheless, the loss and profit account does provide relevant information on firm resources. Thus, the asset turnover (quotient of firm sales divided by total assets) can be used to ascertain the firm level of efficiency in the use of resources. Asset turnover is therefore a suitable indicator of the amount of slack resources in the firm, in such a way that the greater the turnover, the higher the level of efficiency of the assets and, as a consequence, the lower the amount of idle resources. For all of the reasons set forth above, we propose the following hypothesis: Hypothesis 4: There are differences as to the availability of slack (non-financial) resources between high-growth firms and non-high-growth firms, in such a way that the former will have a lower availability of slack resources than the latter. 3. Methodology 3.1 Sample Our empirical research is based on a sample of 6692 SMEs, selected after refining a homogeneous database of firms from Andalusia (Spain). This database comprises 7752 firms and includes their economic and financial information for the years 1998, 1999, 2000 and 2001. The process of refinement was divided into two stages: (1) firms were eliminated if there was a lack of sales volume data during any of the 4 years under study, i.e. 147 firms; (2) ‘large’ firms were excluded. For the purpose of determining which firms were to be considered ‘large’, we applied a criterion based on the average operating income, in such a way that firms with average operating incomes higher than 6 million euros in 1998 were deleted from the sample. According to this criterion, we deleted 791 firms. After the refinement process, the sample included a total of 6814 SMEs. 3.2 Measurement 3.2.1 High-growth firms There is no unique method to measure firm growth throughout a given period (Delmar et al. 2003). There has been an important debate about how to measure firm growth – objective versus subjective approaches; single versus multiple indicators; through sales, assets, employments, and so forth (Weinzimmer 2000, Delmar et al. 2003). Since our source of information was based on the annual accounts, we have used sales growth, consistent with previous works (Baum et al. 2001, Lumpkin and Dess 2001), and with the recommendations of Delmar et al. (2003) on the high correlation among the differents objective indicators available (correlation among growth of sales, assets, and employments was higher than 0.5 (p> 0.001). We have 76 ANA M. MORENO AND JOSE ´C. CASILLAS attention to the lack of relation between age and growth found in our study. We have no accurate information on the distribution by age of the samples used in other works, and therefore cannot make any comparisons. Nevertheless, most of the firms in our sample exhibit very small age differences, a fact that may have affected our results. Thus, more than one-half of the firms are younger than 10 years old and only 5% are older than 25 years. In our opinion, this can explain the lack of significance of the age variable in our study. Table 4. Classification matrices. Estimated frequencies 01 0 decile – 1 decile Observed frequencies 0 348 (50.4%) 342 (49.6%) 1 218 (32.7%) 449 (67.3%) Percentage of well-classified firms ¼58.7% Estimated frequencies 01 0 decile – 2 decile Observed frequencies 0 404 (58.6%) 386 (41.4%) 1 252 (37.8%) 415 (62.2%) Percentage of well-classified firms ¼60.4% Estimated frequencies 01 0 decile – 3 decile Observed frequencies 0 412 (59.7%) 278 (40.3%) 1 260 (39.0%) 407 (61.0%) Percentage of well-classified firms ¼60.4% Estimated frequencies 01 0 decile – 4 decile Observed frequencies 0 439 (63.3%) 251 (36.4%) 1 270 (40.5%) 397 (59.5%) Percentage of well-classified firms ¼61.6% 0 decile – 5 decile Estimated frequencies 01 Observed frequencies 0 440 (63.8%) 250 (36.2%) 1 240 (36.0%) 427 (64.0%) Percentage of well-classified firms ¼63.9% 0 decile – 6 decile Estimated frequencies 01 Observed frequencies 0 447 (64.8%) 243 (35.2%) 1 269 (40.3%) 398 (59.7%) Percentage of well-classified firms ¼62.3% Estimated frequencies 01 0 decile – 7 decile Observed frequencies 0 448 (64.9%) 242 (35.1%) 1 255 (38.2%) 412 (61.8%) Percentage of well-classified firms ¼63.4% Estimated frequencies 01 0 decile – 8 decile Observed frequencies 0 452 (65.5%) 238 (24.5%) 1 233 (35.0%) 434 (65.0%) Percentage of well-classified firms ¼65.3% Estimated frequencies 01 0 decile – 1 decile Observed frequencies 0 488 (70.7%) 202 (29.3%) 1 223 (33.5%) 443 (66.5%) Percentage of well-classified firms ¼68.7% HIGH-GROWTH VS NON-HIGH-GROWTH SMES 83 The results of the three variables related to the availability of financial resources are also worth discussing. While total liquidity does not seem to make any difference between high-growth and non-high-growth firms (TOTLIQ98 is out of the different discriminant equations estimated, and canonical correlations at different structure matrix are below 0.1), solvency and immediate liquidity do appear to be slightly significant in some cases. Such variables tend to show negative coefficients, albeit nonsignificant, in most discriminant functions. However, interestingly, when any of these variables do appear in the discriminant function, the coefficient is positive (such as in the case of the INMLIQ98 and SOLV98 variables). SOLV98 is significant in discriminant equations number 4 and 9 (p< 0.001) with positive canonical correlations (0.163 and 0.134, respectively). At the same time, INMLIQ98 appears significant (p< 0.001) in equations 5, 6, and 7, showing the following correlation in structure matrix: 0.098, 0.146, and 0.119. Both variables are included in the models that relate high-growth firms with firms showing very low growth rates or firms that are in decline (4, 5, 6, 7 and 9 deciles). In short, when the availability of financial resources contributes significantly to distinguish between high-growth and non-high- growth firms, the relation is negative, as proposed in hypothesis 3. In some cases, therefore, high-growth firms are characterized by a low availability of financial resources, whether in the short term (low immediate liquidity) or long term (low solvency). This result seems to support the entrepreneurial approach to growth, according to which more important than the availability of financial resources is the search and exploitation of opportunities (Stevenson and Jarillo 1990, Baum et al. 2001). The turnover, on the other hand, shows a high discriminant power, it being the second variable that most contribute to the distinction between high-growth and nonhigh-growth firms (as shown by the fact that ROTIND98 is significant p< 0.001 in eight of the nine estimated discriminant functions). Similarly, the sign of the structure matrix coefficients shows that high-growth firms start the period with a lower turnover than non-high-growth firms, consistent with hypothesis 4. The canonical correlations in the eight structure matrices in which ROTIND98 is significant, are positive and higher than 0.460, while the centroids of high-growth firms are negative. This fact reveals that the asset utilization level is lower in high-growth rather than in non-high-growth firms within the same sector, and that is why the former need to grow and balance that quotient. The different direction of the influence on growth that is shown by financial resources, on the one hand, and turnover (idle resources) on the other, is due to their level of specificity, divisibility and transferability (Barney 1991). Thus, while financial resources are little specific (they can be put to several uses), fully divisible, and therefore easy to transfer, the firm assets (and some of them more than others), are more specific, less divisible and, hence, more difficult to transfer to external uses. As the firm needs to put this second type of slack resources to use, they foster the firm growth. Financial resources, unlike their idle counterparts, can be put to different uses – both inside and outside the firm – that have nothing to do with firm growth (financial investments, distribution of dividends, loan repayment, and so forth). Therefore, the existence of idle assets appears to be a decisive explanatory factor of a firm’s high growth, according to Penrose (1959). This influence, along with that of size, seems to indicate that smaller firms tend to acquire more assets in higher quantities than they actually need in the short term. Nevertheless, we do not know whether this is because of the indivisibility of assets, as suggested by the resources and 84 ANA M. MORENO AND JOSE ´C. CASILLAS capabilities based approach, or it is because of the will of the firm, as stated from the field of entrepreneurship. 6. Conclusion By way of conclusion, we should say that firm growth deserves an increasing attention from researchers. The social and economic development and the generation of new jobs depend, in a similar proportion, on the entrepreneurial capacity to generate new business projects and initiatives, and on the existence of entrepreneurs and managers that are able to turn these embryonic firms into solid organizations capable of withstanding the current international competition. SMEs’ growth is an essential challenge within this framework. Although this paper brings some light into the differences between high-growth and non-high-growth firms, further investigations must be conducted to provide more insight into the phenomenon of firm growth. Although there exists an extensive previous research on firm growth, this paper provides three significant contributions. The first refers to a higher precision of the object to be explained. Thus, unlike other analyses devoted to overall growth, this paper exclusively focuses on high-growth firm differentiation. The second is the combination of two different theoretical approaches, thanks to which we can focus on the reasons that explain some of the results achieved in previous investigations. Thus, the existence of slack resources, and especially of those characterized by higher indivisibility, seems to be the major cause of higher growth for the SMEs. The third contribution is that, when it comes to defining and measuring high-growth firms, we have taken an approach by industry, isolating in this way the implications of the sector lifecycle on the growth of each individual firm. Results of the empirical research show the important role of resources as a determinant of growth of SMEs. More research is needed in order to improve our knowledge about what kind of resources promotes the high-growth behaviour of firms. Several issues could be considered, following the ideas proposed by Penrose (1995). Two of them are interesting from a practical point of view. The first one is related to the sources of resources. Resources (human resources, technological resources, financial resources), can be obtained from outside of the firm. This is the case of the ‘networked’ firm. SME networks constitute a way to get access to key resources. Firms connected to these kind of networks probably are in a better position to grow faster. The second one is the role of ‘knowledge’ as a key resource for growth. Our research finds that useless resources are important to grow, but it is focused on ‘physical resources’ (tangible and financial resources). Nevertheless, the ability to get access to new knowledge probably (from internal development and/or from external acquisitions) constitutes a dynamic capability very important to be a high-growth firm (Zahra et al. 2006). Nevertheless, along with these novelties, the work has some limitations. Among the most important, we should mention the following: First, the empirical work has been carried out in a particular geographical context, and therefore we are not sure of the real possibility of extrapolating to other settings. Second, the information used was obtained from the annual accounts of the firms, and therefore certain dimensions have not been dealt with in detail; among them, the nature of slack resources, the possibilities of receiving new funds, and so forth. HIGH-GROWTH VS NON-HIGH-GROWTH SMES 85 Despite the above weaknesses, however, the work opens a wide spectrum of questions that deserves further discussion in future investigations. In this sense, the main question posited by our results is to what extent the firm high growth is produced by a behaviour oriented towards the efficient use of existing resources, according to the theory of resources and capabilities, or by an entrepreneurial behaviour, oriented to the identification and exploitation of opportunities beyond the available resources. On the other hand, from a more functional approach, it should be of interest to extend this study to other geographical areas, explore larger samples and consider other factors like the type of growth (organic versus acquisitions). Similarly, future research could provide insight into the comparison of the discriminant analysis results in different time spans. 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