The growth of pharmaceutical firms: A comment

Of the three preceding chapters that are the subject of my review, two concentrate on the stochastic growth equation for firm size and the other on the process of invention and how it may influence the degree of concentration. My remarks here are chiefly concerned with relating the results of the three studies to two well-known neoclassical models. Section 9.2 describes (parts of) the two models. It starts by interpreting equation (6.2) of Cefis, Ciccarelli, and Orsenigo’s chapter and, indirectly, equation (7.6) of Bottazzi, Pammolli, and Secchi’s chapter in terms of the technology of the firm and in terms of shocks. The model will also explain a particular finding of those two studies concerning the autocorrelation of growth. The interpretation follows Lucas and Prescott (1971). Section 9.3 outlines another model, based on Chari and Hopenhayn (1991), that relates to a cornerstone of Garavaglia, Malerba, and Orsenigo’s chapter. Finally, section 9.4 contains some brief conclusions. 9.2 Gibrat’s law and the Q-theory of growth This section refers to chapter 6, by Cefis, Ciccarelli, and Orsenigo, and chapter 7, by Bottazzi, Pammolli, and Secchi. Equation (6.2) models a firm’s growth rate as g_t = α + ρg_t-1+ η_t (9:1) where the firm subscript has been dropped to ease notation. I shall now provide a structural interpretation of this equation that links it to the Q-theory of investment. Define a firm’s state of technology as z and its capital as K. Its output therefore is y = zK The firm is competitive and we normalize its output price to unity.