In this chapter we investigate the growth, innovative performance and survival of new entrepreneurial ventures. Section 9.1 outlines an integrated theoretical model of firm entry, growth and exit by Jovanovic (1982). This model provides a useful framework for understanding why some small firms survive and grow, and why others die. It is also helpful for interpreting empirical results on these phenomena. Section 9.2 summarises evidence about the growth of small firms and innovation. Section 9.3 presents facts about the survival and exit of new small firms, and their determinants.

It is helpful to clarify at the outset what the chapter does not attempt to do. We do not cover the literature on dynamic industrial organisation that has developed since Jovanovic (1982) (see, e.g., Ericsson and Pakes, 1995). Nor do we analyse market entry by new firms, since many of these are not wholly new firms, but existing firms that have diversified into a new market, or that have re-positioned themselves from a different industrial sector (Storey, 1991). Nor will we repeat results about factors affecting market entry by entrepreneurs covered elsewhere in the book.

Jovanovic's (1982) dynamic selection model

In a highly influential paper, Jovanovic (1982) developed a model in which entrepreneurs have imperfect information about their innate abilities, which they can learn about only by trying entrepreneurship. The model shows that the ventures of able and/or lucky entrepreneurs survive and grow, while those of less able and/or unlucky entrepreneurs shrink and exit.