Does the Firm Size Matter? An Empirical Enquiry into the Performance of Indian Manufacturing Firms

The Law of Proportionate Effect depicts that firm's growth rate is independent of its size; Gibrat (1931). Some of the existing studies support the Law: Hymer and Pashigian (1962), Mansfield (1962), among others. However, Gale (1972), Shepherd (1972) and recently Punnose (2008) report a positive relationship, while Haines (1970) and Evans (1987) observe an inverse relationship between firm size and profitability. Baumol (1959) opined that rate of return increases with firm size.

Manufacturing firms' data from Steel and Electrical & Electronics (EE) industries are considered for the period 2004-05 to 2006-07. Firm size affects current profitability: positively in Steel and negatively in the other. Some more determinants of firm performance are explored. Retained earnings have negative impact on profitability in Steel but, positive in EE. Bank credit is found negatively significant in both the industries. Market share of firms and industry concentration ratio (CR₄) although inconsistently are the other significant determinants of firms' performance. Market value of firms (Tobin's Q) is found positively significant, reflecting the importance of high brand equity for corporates. Interestingly, the impact of size is affected by firms' market value: firm size positively affects profitability both in Steel and EE.