Author: Yoshiyuki Arata, RIETI

Many people talk about “using innovation to promote corporate growth and further revitalize the Japanese economy (Note 1).” The word “innovation” has been used frequently in newspapers and television shows alike in recent years. Innovation is also a key concept in academic research and seen as a source of corporate growth. Empirical debate of this theme typically takes the approach of statistically examining the relationship between research and development (R&D) investment and corporate growth. In this article, I adopt a slightly different perspective with emphasis on the “distribution” of corporate growth rates.

Distribution of corporate growth rates

Individual companies have individual circumstances with a variety of reasons for achieving growth. Yet, at the same time, it is a known fact that plotting the distribution of corporate growth rates shows a distinctive statistical characteristic, which is observed in just about any country and industry. Figure 1 is a histogram showing the growth rates of Japan’s listed companies. Compared to the normal distribution (broken line), there is a sharp spike in the middle with fatter tails. Since the spike corresponds to a growth rate of around zero, the histogram indicates little business expansion or contraction for most companies. At the same time, the fatter tails indicate higher probability in large growth fluctuations compared to the level anticipated in the normal distribution. This means that when companies expand or contract, the scale of expansion or contraction is substantial. Simply put, when they change, it is done dramatically.

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