Companies often grow by expanding their own operations—opening new facilities or enlarging existing ones. This type of growth, known as organic growth, is usually the main driver of industry and company expansion. But another strategy—growth through deals like mergers, acquisitions, and divestitures—turns out to be more closely linked to long-term survival.
A study from the University of Michigan’s Ross School of Business, which analyzed employment growth in all U.S. companies between 2004 and 2013, sheds light on these patterns. It reveals some surprising insights about how firms grow and adapt to challenges.
Growth in Practice
Firms rarely grow using only one method. Instead, they combine approaches—acquiring other companies while also investing in new facilities, for instance. Firms that focus solely on one strategy, like acquisitions, tend to miss out on other opportunities for growth.
Competition also influences how firms adjust their strategies. For example, when faced with cheaper imports due to lower tariffs on Chinese goods, many firms shrank their operations. They cut back acquisitions, closed plants, sold off assets, and even downsized existing facilities. Yet, despite these reductions, they continued experimenting by opening new locations.
The 2008 financial crisis highlighted the vulnerability of different growth strategies. Job losses mainly came from layoffs at existing operations rather than closures, which were less frequent than before the crisis. However, fewer new businesses were launched, and the number of mergers and acquisitions dropped sharply as buyers became scarce. This decline in deal-making reduced the benefits of selling or closing operations during the recovery.
Young vs. Old Firms
One counterintuitive finding is that large firms run by younger companies grow more slowly than older ones. This goes against the common belief that younger firms are more dynamic. The result aligns with a classic theory by economist Edith Penrose, who argued that firms need time to develop the expertise needed to manage growth. After a burst of expansion, a period of slower growth is often necessary to consolidate and strengthen operations.
For small firms, the story is different. Younger businesses in this category grow faster, reinforcing their reputation as key drivers of innovation and job creation.
Firms that grow through deals like mergers and acquisitions are more likely to survive and grow further than those that rely solely on organic strategies. This could be because more established, productive firms are better positioned to make deals or because mergers create synergies that help industries consolidate and thrive.
The study controlled for factors like company size, past growth, and industry conditions, showing that acquisitions often bring new skills, resources, or ideas that help firms perform better. It may also be that firms with strong internal capabilities are more likely to pursue deals, giving them an edge over time.
What This Means for Policymakers and Managers
Policymakers often focus on supporting small, young firms, and this makes sense—these businesses are major sources of growth. But the findings suggest that pouring resources into them without care could backfire. Once small firms grow larger, their growth rates often slow as they face new challenges.
For managers, the message is clear: mergers and acquisitions can boost performance if done wisely. While deals can be risky and expensive, they often provide the skills and assets needed to succeed in competitive markets. For many firms, buying growth may be just as important as building it.
