A much-needed methodology aimed at identifying and helping gazelles

Research Highlight A much-needed methodology aimed at identifying and helping gazelles

Professor Ivan Savin and his co-author showed that contrary to popular belief, ‘gazelle’ companies, which are essential for stimulating economic growth and employment, are not concentrated in high-tech, may be rarer and do not own their success purely to chance. Their methodology for identifying them could help increase the effectiveness of public support measures.

In an article entitled Les misérables, The Economist 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 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. “Over the last few decades, job creation has been one of the key priorities for policymakers around the world. Especially in times of economic instability, governments are taking active measures to stimulate employment growth,” write Ivan Savin and Maria Novitskaya in an article published by the Eurasian Business Review.“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’.”

Between elephants and mice, you’ll find gazelles

Economist David Birch first coined the term gazelle in his 1987 book, Job Creation in America: How Our Smallest Companies Put the Most People to Work. He defined these 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.” He contended that they generate most of the new net jobs in the economy, 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 ten fastest-growing companies in Fortune’s 2020 global ranking.

A species difficult to define

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 gazelles were based on arbitrary thresholds with regard to 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,” the authors write.

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?

Tough luck: Chance ruled out as a driver of success

By using advanced statistical methods and a large amount of empirical data, Professor Ivan Savin and his co-author ruled out the ‘luck’ factor put forward by some. This helped to show that the success of the gazelles could not be explained by luck alone.

"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," the authors write.

As a criterion to define gazelles, the study took into account the steady growth in employment in companies. By doing that, the authors 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,” adds Prof. Savin.

The necessity of debunking myths

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; 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 gazelles the authors 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 policymakers could be more selective in stimulating market entry and increasing the number of startups in different sectors since most new businesses do not perform well, and subsidizing all of them may be counterproductive. 

According to Ivan Savin, “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.”

The 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. The authors state that 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 gazelles and differentiated support measures for these companies from policymakers. 

"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 were simply not available,” further notes Professor Ivan Savin. “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..."