Growth and survival of firms
Growth and survival of firms: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 7.7; A Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is a horizontal merger?
What you will learn
- Explain why firm size varies
- Compare organic growth with diversification
- Classify horizontal, vertical and conglomerate integration
- Evaluate cartels and their stability
- Explain the principal-agent problem
Core model and terms
Firms differ in size because of technology, market scale, finance, ownership aims and the ability to coordinate. Organic growth expands an existing operation; diversification adds products or markets. External growth through mergers can be horizontal (same stage), vertical (different stages, forward toward customers or backward toward inputs) or conglomerate (unrelated activities). Each can create economies but may also increase complexity or market power.
Apply and evaluate
A cartel coordinates firms’ decisions to restrict competition; stability depends on monitoring, incentives to cheat, market conditions and enforcement. Owners and managers may also have different objectives: dispersed shareholders may seek returns while managers pursue growth, status or security. Governance and incentives can narrow, but not eliminate, the principal-agent gap.
Pause and explain
Which statement best applies growth and survival of firms?
Worked example
A car manufacturer buys a parts supplier and a dealership. Classify each integration direction.
Show the worked solution
- Buying the parts supplier is backward vertical integration
- Buying the dealership is forward vertical integration
- Both link stages in the same production chain
Answer Buying the parts supplier is backward vertical integration → Buying the dealership is forward vertical integration → Both link stages in the same production chain
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A car manufacturer buys a parts supplier and a dealership. Classify each integration direction.
Give me a hint
Trace the supply chain from input to final customer.
Compare my reasoning
- Buying the parts supplier is backward vertical integration
- Buying the dealership is forward vertical integration
- Both link stages in the same production chain
Buying the parts supplier is backward vertical integration Buying the dealership is forward vertical integration Both link stages in the same production chain
Look for these in your work
- Buying the parts supplier is backward vertical integration
- Buying the dealership is forward vertical integration
- Both link stages in the same production chain
A retailer opens its own online store and logistics centre. Is this organic or external growth?
Give me a hint
Check whether growth comes from internal development or an acquisition.
Compare my reasoning
- The retailer builds new capabilities itself
- No merger is described
- This is organic growth
The retailer builds new capabilities itself No merger is described This is organic growth
Look for these in your work
- The retailer builds new capabilities itself
- No merger is described
- This is organic growth
Why might a cartel be difficult to sustain when demand is high and firms can secretly discount?
Give me a hint
Compare the short-run gain from cheating with the shared agreement.
Compare my reasoning
- A discount can attract extra customers
- Each firm may gain by secretly undercutting
- Weak monitoring and strong cheating incentives can destabilise the cartel
A discount can attract extra customers Each firm may gain by secretly undercutting Weak monitoring and strong cheating incentives can destabilise the cartel
Look for these in your work
- A discount can attract extra customers
- Each firm may gain by secretly undercutting
- Weak monitoring and strong cheating incentives can destabilise the cartel
Managers choose a low-risk expansion that protects their positions, while owners prefer a higher-return project. Identify the issue and one response.
Give me a hint
Compare decision-makers’ objectives and incentives.
Compare my reasoning
- Managers and owners have diverging objectives
- This is a principal-agent problem
- Performance-linked governance may align incentives, though measures can create new distortions
Managers and owners have diverging objectives This is a principal-agent problem Performance-linked governance may align incentives, though measures can create new distortions
Look for these in your work
- Managers and owners have diverging objectives
- This is a principal-agent problem
- Performance-linked governance may align incentives, though measures can create new distortions
Common mistakes
- Assuming a merger’s size guarantees efficiency or that a cartel will remain stable when members can gain by cheating.
What can you explain now?
What is a horizontal merger?
Compare with the explanation
A merger between firms at the same stage of production in the same market
The firms combine with direct competitors or peers in the supply chain.
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Make it stick
Before moving on, explain the central idea in growth and survival of firms and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.