Interconnected gears and cogs representing a firm with varying influence, symbolizing granular effects.

Decoding Firm Growth: Why Size Isn't Everything in the Business World

Nico Varela in Business & Economy September 2025 • 4 min read.

"New research challenges traditional models of firm growth, revealing how diversification, sub-unit structure, and those unexpected "granular" effects play a much larger role than previously thought. Are you truly diversified, or just big?"

What governs the growth of a company? It's a complex question, influenced by countless factors, both predictable and unforeseen. While a purely statistical approach might seem futile, recent research increasingly suggests that understanding the dynamics of individual businesses is crucial for grasping broader economic trends, including GDP fluctuations. The questions surrounding company growth statistics resonate far beyond macroeconomics, impacting our understanding of wealth accumulation and even the expansion of cities.

Despite the inherent heterogeneity of business data, certain statistical patterns in firm growth consistently emerge across different countries, time periods, and regardless of how 'size' is measured. Among the most established findings is the non-Gaussian distribution of both firm sizes and their growth rates, indicating a prevalence of 'heavy tails.' In simpler terms, extreme growth or decline events occur far more frequently than standard statistical models would predict.

However, pooling growth rates across different firms presents a challenge. It implicitly assumes a uniform, firm-independent distribution – a notion that clashes with the well-documented inverse relationship between firm size and growth volatility. Larger firms tend to exhibit less volatile growth, a fact that seemingly contradicts the idea of simple diversification. So, how do we reconcile these seemingly conflicting observations?

Beyond Size: Unveiling the Hidden Drivers of Firm Expansion

Interconnected gears and cogs representing a firm with varying influence, symbolizing granular effects.

The simplest explanation – that idiosyncratic growth shocks are normally distributed, with a firm-dependent volatility tied directly to size – falls short. Although such a model generates 'heavy tails,' it fails to fully capture the empirical distribution of growth rates. Furthermore, this approach struggles to accurately represent the volatility of the largest corporations, highlighting the need to consider additional factors.

To address these limitations, researchers have explored more intricate models that acknowledge the multi-faceted nature of firms. Here's where 'island models' come into play, enriched by two key features:

Diversification: Firms operate in multiple, independent markets, behaving like a collection of sub-units.
Granularity: Sub-units vary significantly in size, leading to concentrated activity within a select few.

These 'compositional models' generate growth rate distributions that better reflect real-world data. While models can reproduce the empirical distribution, capturing the volatility-size relation proves challenging. Some are successful in both like granular models of firm growth, representing key advancements.

The Road Ahead: Exploring the Uncharted Territories of Firm Growth

This research illuminates the limitations of existing models, suggesting that mechanisms driving business evolution remain elusive. What unexpected factors are at play? Uncovering how shocks impacting sub-units become increasingly correlated as firm size grows represents a crucial avenue for exploration. By connecting firm growth to broader economic forces, researchers can refine models and ultimately achieve a more complete account of observed business patterns.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2404.15226,

Title: Revisiting Granular Models Of Firm Growth

Subject: econ.gn q-fin.ec q-fin.gn

Authors: José Moran, Angelo Secchi, Jean-Philippe Bouchaud

Published: 23-04-2024

Everything You Need To Know

What are the primary drivers of firm growth beyond the simple concept of size?

The research highlights that diversification, sub-unit structure, and 'granular' effects are far more significant in determining firm growth than size alone. Diversification, where firms operate in multiple independent markets, allows them to behave as a collection of sub-units. Granularity, which refers to the significant size variations among these sub-units, also plays a key role. These factors combined reshape how we understand business expansion. The study challenges traditional size-based models by demonstrating that these internal aspects significantly impact a company's growth trajectory.

How does diversification influence a company's growth, and what are the implications of this approach?

Diversification, in the context of the research, means that firms function within multiple independent markets, essentially operating as a collection of sub-units. This approach shields firms from risks associated with reliance on a single market. When a firm is diversified, it can allocate resources and adapt more effectively to market fluctuations. Diversification strategies can lead to greater resilience and sustainable growth. The research suggests that firms that adopt diversification are better positioned for growth compared to those that focus solely on size.

What are 'granular' effects, and why are they important in understanding firm growth?

'Granular' effects relate to the significant size variations within a firm's sub-units. In a granular model, some sub-units are much larger and more active than others. These models can better reflect real-world data related to firm growth rates. This means that a firm's overall growth isn't uniform across all of its parts; instead, it's driven by the performance of key sub-units. Understanding granular effects helps researchers create more accurate growth models by accounting for the uneven distribution of activity within a firm, especially when capturing the volatility-size relationship, thus contributing to a more comprehensive view of business expansion.

How do 'island models' contribute to a better understanding of company growth, and what are their key features?

'Island models' provide a more nuanced perspective on firm growth. They incorporate two key features: Diversification, where firms have multiple independent markets, and Granularity, where the sub-units vary in size. These compositional models help generate growth rate distributions that more closely match real-world observations. They acknowledge that firms are not uniform entities, and their internal structure impacts growth. The goal of these models is to better represent the complexities of business and its evolution, revealing the limitations of traditional models.

What are the limitations of the existing models, and what are the potential future research directions in this area?

Existing models often struggle to fully capture the dynamics of firm growth, particularly the relationship between size and volatility, and the complex distribution of growth rates. The research indicates that current models, such as those based on normally distributed idiosyncratic growth shocks, fall short in explaining real-world firm behavior, especially for large corporations. Future research should focus on understanding how shocks affecting sub-units become correlated as a firm expands. This may help refine models and achieve a more complete understanding of observed business patterns, ultimately helping to refine models and achieve a more complete account of observed business patterns.