The Validity of Gibrat's Law in Developed and Developing Countries (2008–2013): Comparison based Assessment

The Gibrat's Law of Proportionate Effect, indicated that the growth rate of a given firm is independent of its size at the beginning of the examined period. While earlier studies tended to confirm the Law, more recent research generally rejects it. This paper aims to highlight important empirical studies that performed analysis of Gibrat's Law in which about 50 papers were taken into account for this study. The main objective of this paper is to investigate the validity of Gibrat's Law in developing countries based in developed countries. In this paper the literature on Gibrat's Law was reviewed based on three types of empirical results: the first type accepts Gibrat's Law, the second type rejects Gibrat's Law, and the third classification reconciles both acceptance and rejection of Gibrat's Law. It was found that in most of the manufacturing sector, Gibrat's Law fails to hold but for the service sector Gibrat's law was valid. Additionally, only a few empirical studies have investigated Gibrat's law in developing countries; most of the studies have been conducted in developed countries. Furthermore, most of the empirical studies that have been applied in the developed countries rejected the Gibrat's Law. Finally, based on the features of SMEs that it's a labour intensive, and has the ability to absorb a lot of labour due to the low cost of creating job opportunities for both developed and developing countries. From this overview, it can be deduced that it is possible to implement the law for developing countries, which in turn could probably have the same result that the Gibrat's Law is not valid as smaller firms tend to grow faster than larger firms.