Size Matters: The Moderating Impact of Firm Size on Formalization and Performance for New Firms

Prior research on formalized organizational structure and entrepreneurship argues that new firms with formal structure perform better than new firms with less formal structure in dynamic contexts. However, research on teams finds that formal structure leads to poor performance when teams are small, suggesting that the benefits of formal structure for new firms operating in a dynamic environment is contingent on the size of the new firm. In this paper, we examine the moderating effect of firm size on the formalization–new firm performance relationship using a randomized controlled experiment with a sample of 600 new firms founded in Peru during a period of high market dynamism. In contrast to past research on formalization and entrepreneurship in dynamic contexts, we find that small new firms with less formal structure perform better than small new firms with more formal structure.