Examination of the profit-growth nexus in Australian ICT SMEs

Economic theory suggests the interaction of firm size, growth and profitability, presenting well known trade-off situations to businesses. The logic of business finance describes a trade-off between firm growth and profitability and Gibrat’s Law asserts that firm growth is independent of firm size, implying that firm size and profitability are independent. Empirical literature examining businesses however overwhelmingly found evidence of a positive relationship between firm size and growth. This theoretical paradox can be rectified by examining small businesses specifically, observing the temporal horizon of the firm profit-growth relationship, and industry dynamics also play a role. A large sample empirical investigation exploring the views of owners and managers of Australian ICT SMEs established using multivariate statistical analysis, that firm size, profit and growth are all positively related to each other. These results clearly reject Gibrat’s Law, and dismiss the profit-growth trade-off, demonstrating the nature of the IT sector business growth model and possibilities in the Australian context. It is concluded, that long standing laws of economic theory may be violated under different contextualisation