What are 'gazelle' companies and why are they essential for growth?
Gazelle companies are essential for stimulating economic growth. Image: Unsplash/Campaign Creators
Ivan Savin
Professor of Quantitative Analytics, ESCP Business School (Madrid campus) , Research Fellow, Institute of Environmental Science and Technology (ICTA - UAB)Listen to the article
- Fast-growing ‘gazelle’ companies are widely considered essential for stimulating economic growth and employment.
- Contrary to popular belief, they are not concentrated in high-tech, may be rarer and do not owe their success purely to chance.
- Here we explain why a methodology for identifying them could help increase the effectiveness of public support measures.
In an article entitled Les misérables, The Economist once claimed that Europe has a problem with creating new businesses destined for growth because of its chronic failure to encourage ambitious entrepreneurs.
This is all the more important as economists from the International Monetary Fund (IMF) and the World Bank highlighted the key role of fast-growing companies in economic recovery, and recommended that greater support be concentrated on them.
That’s because the employment rate is one of the main indicators of the labour market, which characterizes the economy as a whole.
We explained in an article published by the Eurasian Business Review that over the last few decades, job creation has been one of the key priorities for policy-makers around the world. Especially in times of economic instability, governments are taking active measures to stimulate employment growth.
The issue of job creation by firms is also widely studied in the scientific literature, with most articles focusing on a small fraction of fast-growing firms, namely the so-called gazelle companies, or simply ‘gazelles’.
Gazelles, a species difficult to define
Economist David Birch first coined the term ‘gazelle company’ in his 1987 book, Job Creation in America: How Our Smallest Companies Put the Most People to Work.
He defined these gazelle companies as “a business establishment which has achieved a minimum of 20% sales growth each year over the interval, starting from a base-year revenue of at least $100,000”.
Birch also contended that they generate most of the new net jobs in the economy, with their job-creation pace far outstripping that of the few ‘elephants’ – large, often publicly traded companies – and ‘mice’ – small-scale businesses.
Back then, a large percentage of companies considered gazelles were in retail sales. Now, it is generally considered that most are found in the technology industry, with AppFolio, Netflix, Amazon, Etsy and the like making up more than half of the top 10 fastest-growing companies in Fortune’s 2020 global ranking.
While it is commonly accepted that they are fast-growing companies exhibiting sustained growth and creating disproportionally many new jobs, there is no general agreement on the definition of gazelles.
While many previous definitions of gazelle companies were based on arbitrary thresholds about firm size, age, employment and revenue growth, none of them could ensure that the (temporary) success of those firms is driven by good luck only.
Earlier, studies in behavioural economics and psychology stressed that people mistakenly try to fit patterns to completely random observations. This is because people tend to regard a small sample of observations randomly drawn as highly representative, which explains some misperceptions of random sequences (take the ‘hot-hand fallacy’ describing people’s tendency to believe that a successful streak is likely to lead to further success).
In fact, a completely random process can produce a long sequence of seemingly extraordinary performances that is nothing else than a by-product of chance.
The relevant question, therefore, is: would a firm that was increasing its number of employees in the last few years keep increasing it further, or was it just by chance?
Chance ruled out as a driver of success
By using advanced statistical methods and a large amount of empirical data, we ruled out the ‘luck’ factor put forward by some. This helped to show that the success of gazelles could not be explained by luck alone.
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This means that identified gazelles must have competitive advantages, which can be reflected in, among other things, better resources, technology, management procedures, value chain partners that enable them to expand their market share at the expense of competitors and sustainably perform better.
As a criterion to define gazelles, our study took into account the steady growth in employment in companies. By doing that, we showed that firms in Russia, to be classified as gazelles, need to show steady growth over a longer period than in Spain.
This is likely due to the transition state of the former economy, with a larger number of empty market niches that firms can fill, which creates opportunities for fast growth.
As a result, gazelles accounted for about 1-2% of the total number of firms in both countries. They secured 13-15% of employment growth in Russia, and around 9% in Spain.
Contrary to the myth that gazelles are concentrated in high-tech industries, in Russia they are concentrated in information and communications, wholesale and retail trade, and transportation and storage.
Meanwhile in Spain, gazelles are also concentrated in wholesale and retail trade, but also education and real estate. In other words, it is these sectors that can serve as a source of employment growth in both economies.
The relatively small share of gazelle companies we identified – compared to the 4-5% on average reported in the literature – indicates that genuine gazelles are a rare species.
This supports the idea that policy-makers could be more selective in stimulating market entry and increasing the number of start-ups in different sectors since most new businesses do not perform well, and subsidizing all of them may be counterproductive.
Our results clearly show which firms can be called 'gazelles' [...] Identifying them is a challenge for future research that will improve employment promotion and economic growth in the long term
”Policy should look at supporting high-growth firms
Policy should focus on identifying and supporting high-growth firms, which is not easy as one has to avoid believing popular myths about gazelles and think of time-specific and peer-based support measures, such as consultations and networking with experienced entrepreneurs in periods of market turbulence or business transition.
Our study does not identify the factors that would explain the steady growth of gazelles, but shows which firms can be described as fast-growing and exclude the factor of luck.
There is no universal definition of gazelles – the difference in performance between Spain and Russia confirms the need for a more in-depth analysis of gazelle companies and differentiated support measures for these companies from policy-makers.
Previous studies have failed to find consistent features of gazelles, apart from their growth, but it could not be ruled out that data that would reflect these features was simply not available.
Our results clearly show which firms can be called gazelles and hence, the factors that justify their success must exist. Identifying them is a challenge for future research that will improve employment promotion and economic growth in the long term.
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