Testing relationships between firm size and perceptions of growth and profitability: An investigation into the practices of Australian ICT SMEs

Abstract

Gibrat's Law mandates the independence of firm size and growth, while the resource-based view of the firm implies a positive relationship between firm size and profits, to be concluded in a profit-growth trade-off. Empirical studies of entrepreneurial success however, have demonstrated firms' ability to reach a state of high growth and profitability, despite the trade-offs encapsulated within the profit-growth nexus. Upon assessing the relationships between past profitability, current firm growth and size in Australian ICT SMEs, results demonstrate positive relationships between all three indicators. This suggests that profitability can be considered the most important precursor of entrepreneurial success, and also that successful businesses do not suffer from the trade-offs implied by theory.