Innovation and Corporate Dynamics A Theoretical Framework

Abstract

We provide a detailed analysis of a unifying theoretical framework for
innovation and corporate dynamics that encompasses the Gibrat’s Law of
Proportionate Effect and the Simon growth process as particular instances. The
predictions of the model are derived in terms of (i) firm size distribution, (ii) the
distribution of firm growth rates, and (iii-iv) the relationships between firm size
and the mean and variance of firm growth rates. We test the model against
data from the worldwide pharmaceutical industry and find its predictions to
be in good agreement with empirical evidence on all four dimensions. Our
unifying stochastic framework can also be used to describe corporate dynamics
in different industries and as a benchmark for discriminating among alternative
data generating processes.