# **Findings**

Evidence on growth patterns showed that firms in conflict areas grow slower than in other countries. This is especially true for urban areas: in countries with severe conflicts were not the growth poles as in other countries of South Asia Region. Furthermore, there is evidence that larger companies grow faster. However, unconditional and even conditional tests of the quality or difference of means do not provide the full picture that can be outlined using the Interim Enterprise survey data.

## **Descriptive statistics suggest a non-linear relationship between growth intensities and explanatory**

**factors like size or age.** If we want to study firm behavior at both ends of the distribution we should use a different econometric method than those methods usually employed (e.g. ordinary least squares, panel or robust regression) when studying firm growth. Traditional methods aim to identify average firm behavior, which assumes an average effect of explanatory variables to hold across the entire distribution of growth rates.

The results show a non-linear relationship, and largely confirm the insights from the descriptive statistics:

- **First, investment in physical assets is a key driver for employment growth** – the faster firms grow the more important investment is.

- **Second, size in the base year gains importance with increasing expansion; age does not matter.** The size of a firm in the base year is positively associated with higher growth for fast growing firms; yet, it has no significant effect on companies with reducing or stagnant staff figures. These results are sensitive to the choice of growth indicator: the relative growth indicator, which favors small firms, finds significant results for fast growing firms, yet, the coefficient is negligibly small and negative.<sup>14</sup> This is an interesting finding, since one would expect the relative growth indicator to be strongly negative for high levels of growth, due to its computational method (see for instance Dunn et al, 1989 on growth patterns and size). This finding points at problems of small firms to grow to a medium size. Interestingly, age has no significant effect.

- **Third, the location of the firm is an important determinant** of its growth performance. Firms in capital cities or cities with more than one million inhabitants were growing significantly faster than establishments in non-urban areas.<sup>15</sup>

- **Fourth, companies in severe conflict areas have also been affected in their growth performance.** Firms in urban areas have expanded significantly lower than their counterparts in areas with a moderate conflict. This result is again driven by the choice of the indicator, since firms in conflict areas are smaller than their counterparts elsewhere.

> 14 The coefficient of the relative growth indicator turns zero; this indicator should be negative since it favors smaller companies. Further robustness checks using showed that size is a positively related to growth in Afghanistan, Bangladesh, India, Pakistan and Sri Lanka. The results for Bhutan and Nepal were insignificant. 15 The coefficient of the urban indicator turns negative and significant if we use the ordinal indicator of size of locality which decreases in size – reflecting the increasing disadvantage of being located in a non-rural area.

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