THE VALIDITY OF GIBRAT’S LAW IN DEVELOPING COUNTRIES (2005-2013): COMPARISION BASED ASSESSMENT

Abstract

According to Gibrat’s Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the examined period. While earlier studies tended to confirm the Law, more recent research generally rejects it. This study aims to highlight important empirical studies that performed analysis of Gibrat’s Law in which about 60 papers were taken into account in this study. The main objective of this study is to investigate the validity of Gibrat’s Law in developing countries. The present study classifies the literature on Gibrat’s Law based on three types of empirical results: the first type accepts Gibrat's Law, the second type rejects Gibrat's Law, and the third classification reconciles both acceptance and rejection of Gibrat's Law. We found that in most of the manufacturing sectors, Gibrat’s Law fails to hold, but for the service sector Gibrat’s law was valid. Additionally, only a few empirical studies have investigated Gibrat’s law in developing countries; most of the studies have been conducted in developed countries. Furthermore, most of the empirical studies that have been employed in the developed countries rejected the Gibrat’s Law. In conclusion, based on the labor intensive feature, SME has the ability to absorb a lot of labor due to the low cost of creating job opportunities for both developed and developing countries. From this overview, it can be inferred that it is possible to implement the law for developing countries, and therefore we could probably have the same effect that the Gibrat’s Law is not valid as smaller firms tend to grow faster than larger firms.