Abstract

     Previous studies on the impact of firm growth on survival have paid little attention to agglomeration externalities. This study theoretically analyses how different agglomeration externalities affect the relationship between growth and survival. Using data from China’s manufacturing start-ups, we confirm a U-shaped relationship between the growth and survival risks of start-ups. Moreover, we find that different agglomeration externalities have heterogeneous moderating effects on this U-shaped relationship. Specifically, specialization and diversification externalities have significantly negative and positive moderating effects, respectively. The positive moderating effect of diversification externalities comes from the moderating effect of related variety externalities, whereas unrelated variety externalities have no significant moderating effect. The robustness test results support the above conclusions and suggest that the moderating effect of specialization externalities is heterogeneous in terms of firms’ resources.

Introduction

     In strategic management, growth is believed to affect not only the success of a firm at a certain stage but also its survival. Regarding growth as a strategic choice and process facilitates a deep understanding of a firm’s early survival process (Gjerløv-Juel and Guenther, 2019, Pe’Er et al., 2016). Many studies have discussed the relationship between growth and firm survival. The literature enriches our understanding of the survival outcomes of growth, but a consistent conclusion has not yet been reached.1 Moreover, existing research on the relationship between growth and survival rarely considers the interactions between growth and external factors.

     Recent studies have emphasized that exploring the underlying mechanism of business failure requires consideration of internal and external factors (Karabag, 2019, Zhang et al., 2019). They argued that, although few studies have explained how the interaction of firms’ external environment and managerial decisions (or strategic actions) contributes to business failure, interaction is not unimportant. Thus, when exploring the drivers of firm failure, we need an integrated framework that includes internal and external factors and considers the interaction of internal and external factors. Therefore, research on the survival outcomes of growth may need to be systematically reexamined to explore the role of the external environment.

Conclusions

     In strategic management, scholars emphasize that firm survival results from the external environment and internal decision-making. In this study, we use China’s manufacturing start-ups from 1999 to 2007 as a research sample to investigate the impact of growth on survival and analyze the moderating effect of different agglomeration externalities on the relationship between growth and survival. A U-shaped relationship exists between growth and survival risk for Chinese manufacturing startups. Given that most observations fall on the left side of the U-shaped curve, the positive effects of growth dominate.

     Different agglomeration externalities have different moderating roles in the relationship between growth and survival. Specialization externalities play a negative moderating role because they provide benefits that are substitutes for growth benefits and reduce the costs of growth. Meanwhile, diversification externalities play a positive moderating role because they push firms to rely on their internal growth benefits to survive and increase growth costs. After decomposing diversification, we find that the moderating effect of related variety externalities follows the same direction as that of diversification externalities, whereas unrelated variety externalities have no significant moderating effects. Therefore, the positive moderating effect of diversification externalities arises from related variety.