THE VALIDITY OF GIBRAT'S LAW IN INDIVIDUAL SECTORS OF CZECH ECONOMY

Background: The study is focused on the relationship between firm size and firm growth in the Czech Republic. In accordance with Gibrat's law which is also known as Law of proportionate effect, firm growth is the stochastic process that does not depend on firm size. The aim of this study is to test the validity of Gibrat's law at the sectoral level using 1-digit Statistical classification of economic activities in the European Community Rev.2 (NACE). Methods: The data are taken from database Albertina Gold Edition. The data for more than 36 thousand of Czech firms in the period 2008-2013 is used. To examine the relationship between firm size and firm growth, the linear auto-regression model is applied and subsequently F-test is used to verify the null hypothesis that Gibrat's law is valid. Because of specifics of public sector, we test the Gibrat's law validity only for private sector (sector A-N according to NACE). Results: The validity of Gibrat's law is rejected on the aggregate level and also for most of the industries in the Czech Republic. The validity of law is not rejected only in mining and quarrying (sector B) and financial and insurance activities (sector K). The smaller firms tend to grow faster than larger ones in other industries. Conclusion: The study concludes that the Gibrat's law is not valid in the Czech Republic in period 2008-2013 using industry level and smaller firm grow faster in comparison with their larger counterparts in the great majority ofprivate sector. The reasons could be more: size of industry, competition rate, minimum effective scale of production, greater flexibility of smaller companies or support of small and medium size business. Here is the place for further research.