Why Do Firms Need Growth?

Growth is one of the most prominent business objectives of many firms. In recent years it has become almost self-evident that a company has to grow in order to be successful. No matter what firm or business, there always seems to be a need for further expansion. In other words, growth has become an imperative.

Admittedly, this may not come as a surprise, considering we live in an economic system that builds on constant growth (see also Do We Really Need Economic Growth?). In that sense, companies would need to grow simply because they are a part of the system and all the others are doing it too, right? Well, fortunately it is not quite that simple.

In fact, the need for growth firms experience depends on several factors. These include the owners' ambitions, the age, the markets, the current size, and the ownership structure of the company. The most important of these determinants is the ownership structure, or more specifically, whether a company is privately or publicly owned.

Private Companies

In general, privately held companies do not depend on growth as much as public firms. Obviously in the beginning they require a certain level of growth to establish a presence in the market and to become self-sustainable. However, once they reach this critical size, their need for growth may actually decrease for the following reasons:

Ultimately, there are several reasons for private companies to stay small (once they are self-sustainable). Of course this does not hold true for all private firms. There are still plenty of privately held companies that have a strong need for growth. In fact, some of the worlds largest companies are privately owned. Nonetheless it is safe to say that it is not always necessary for private companies to grow continuously in order to be successful in the long run.

Public Corporations

Unlike private companies, public corporations usually experience an extremely high need for growth. This is mainly due to the fact that the shareholders (i.e. the owners) mostly see their ownership stake as a short- to midterm investment. Thus they demand high payout ratios and dividends as soon as possible. If corporations do not grow continuously, they will not be able to meet those demands in the long run for the following reasons:

In conclusion publicly held companies can only survive if they are able to provide attractive investment opportunities. If dividends don't grow, shareholders could have just bought government bonds with a similar interest rate but at a much lower risk. Once again, there may of course be exceptions to this rule, but in general it can be said that corporations have to either "grow or go" in the long run. 

In a Nutshell

We live in an economic system that builds on constant growth. Accordingly this is also one of the most prominent goals of many companies. However, the need for growth that companies experience depends on several factors including the owners' ambitions, the age, the markets, the current size, and most importantly the ownership structure of the companyPrivately held firms often do not need to grow beyond a certain point, because they are characterized by low complexity, limited capacity, long-term orientation, niche market positioning, and less dependence on capital markets. Public companies on the other hand need growth because they are at risk of losing their competitive edge, customers, market valuation, investment capital, and resources if they stop growing. In that case they cannot pay increasing dividends anymore and thus become a less attractive investment opportunity. 

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