Inter-relationship between firm growth and profitability in a context of economic crisis
Abstract
This paper examines the dynamics between growth and profitability in an economic crisis context by considering the endogeneity of this relationship. It also analyzes the role of innovation and export intensity in the growth-profit relationship. Using a large firm-level dataset comprising Spanish manufacturing companies during the pre-crisis (2000–2007) and the crisis (2008–2014) period, static and dynamic panel data models are estimated. The analysis suggests the following results. First, in the short term, growth has a positive impact on profits, while the effect of profits on growth depends on the measure of growth used. So, employee’s growth requires previous profit but profit does not play a major role as determinant of sales growth. Second, profit rates are found to persist in the short term. In contrast, a reversion of turnover and employees growth rates is observed. Thirdly, the moderation analysis applied shows that the strategy that has enabled firms to grow is export. Moreover, the influence of the export intensity on profitability in the economic crisis period is obtained indirectly through sales and employee’s growth. Unlike expected, innovation efforts do not moderate the relationship between profitability and firm growth.
Keyword : firm’s growth, profitability, innovation, export, manufacturing industry, economic crisis
How to Cite
Fuertes-Callén, Y., & Cuellar-Fernández, B. (2019). Inter-relationship between firm growth and profitability in a context of economic crisis. Journal of Business Economics and Management, 20(1), 86-106. https://doi.org/10.3846/jbem.2019.6928
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Canarella, G., & Miller, S. (2018). The determinants of growth in the Information and Communication Technology (ICT) industry: A firm-level analysis. Economic Modelling, 70(C), 259-271. https://doi.org/10.1016/j.econmod.2017.11.011
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Coad, A., Frankish, J., Roberts, R., & Storey, D. (2013). Growth paths and survival chances: An application of Gambler’s Ruin theory. Journal of Business Venturing, 28(5), 615-632. https://doi.org/10.1016/j.jbusvent.2012.06.002
Coad, A., Daunfeldt, S., & Halvarsson, D. (2018). Bursting into life: firm growth and growth persistence by age, Small Business Economics, 50(1), 55-75. https://doi.org/10.1007/s11187-017-9872-8
Cowling, M. (2004). The growth–profit nexus. Small Business Economics, 22(1), 1-9. https://doi.org/10.1023/B:SBEJ.0000011568.42714.c9
Daunfeldt, S., & Halvarsson, D. (2015). Are high-growth firms one-hit wonders? Evidence from Sweden. Small Business Economics, 44(2), 361-383. https://doi.org/10.1007/s11187-014-9599-8
Davidsson, P., Steffens, P., & Fitzsimmons, J. (2009). Growing profitable or growing from profits: Putting the horse in front of the cart?. Journal of Business Venturing, 24(4), 388-406. https://doi.org/10.1016/j.jbusvent.2008.04.003
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Demirel, P., & Mazzucato, M. (2012). Innovation and firm growth: Is R&D worth it?. Industry and Innovation, 19(1), 45-62. https://doi.org/10.1080/13662716.2012.649057
European Commission. (2014). For a European Industrial Renaissance. COM (2014)14. Retrieved from http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52014DC0014
Federico, J. S., & Capelleras, J. L. (2015). The heterogeneous dynamics between growth and profits: the case of young firms. Small Business Economics, 44(2), 231-253. https://doi.org/10.1007/s11187-014-9598-9
Ferrando, F., Marchica, M. T., & Mura, M. (2017). Financial flexibility and investment ability across the Euro area and the UK. European Financial Management, 23(1), 87-126. https://doi.org/10.1111/eufm.12091
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Fitzsimmons, J., Steffens, P., & Douglas, E. (2005). Growth and profitability in small and medium sized Australian firms. In Proceedings AGSE Entrepreneurship Exchange, Melbourne. https://doi.org/10.2139/ssrn.1263734
Geringer, J., Tallman, S., & Olsen, D. (2000). Product and international diversification among Japanese multinational firms. Strategic Management Journal, 21, 51-80. https://doi.org/10.1002/(SICI)1097-0266(200001)21:1<51::AID-SMJ77>3.0.CO;2-K
Geroski, P., & Machin, S. (2013). Think again: do innovating firms outperform non-innovators?. Business Strategy Review, 24(2), 82-86. https://doi.org/10.1111/j.1467-8616.2013.00959.x
Gibrat, R. (1931). Les Inégalités Économiques. Paris: Recueil Sirey.
Giotopoulos, I., & Fotopoulos, G. (2010). Intra-industry growth dynamics in the Greek services sector: firm-level estimates for ICT-producing, ICT-using, and non-ICT industries. Review of Industrial Organization, 36(1), 59-74. https://doi.org/10.1007/s11151-010-9241-0
Goddard, J. A., Molyneux, P., & Wilson, J. (2004). Dynamics of growth and profitability in banking. Journal of Money, Credit, and Banking, 36(6), 1069-1090. https://doi.org/10.1353/mcb.2005.0015
Goddard, J. A., Liu, H., Molyneux, J., & Wilson, J. (2013). Article: Do bank profits converge? European Financial Management, 19(2), 345-365. https://doi.org/10.1111/j.1468-036X.2010.00578.x
Golovko, E., & Valentini, G. (2011). Exploring the complementarity between innovation and export for SMEs’ growth. Journal of International Business Studies, 42(3), 362-380. https://doi.org/10.1057/jibs.2011.2
Gugler, K., & Peev, E. (2018). The persistence of profits in banking: An international comparison. Applied Economics, 50(55), 5996-6009. https://doi.org/10.1080/00036846.2018.1489111
Gupta, V. K. (1981). Minimum efficient scale as a determinant of concentration: A reappraisal. The Manchester School, 49(2), 153-164. https://doi.org/10.1111/j.1467-9957.1981.tb00943.x
Guarascio, D., & Pianta, M. (2017). The gains from technology: new products, exports and profits. Economics of Innovation and New Technology, 26(8), 779-804. https://doi.org/10.1080/10438599.2016.1257446
Hakala, H. (2011). Strategic orientations in management literature: Three approaches to understanding the interaction between market, technology, entrepreneurial and learning orientations. International Journal of Management Reviews, 13(2), 199-217. https://doi.org/10.1111/j.1468-2370.2010.00292.x
Hirsch, S. (2018). Successful in the long run: A meta-regression analysis of persistent firm profit. Journal of Economic Surveys, 32(1), 23-49. https://doi.org/10.1111/joes.12188
Hsu, W. T., Chen, H. L., & Cheng, C. Y. (2013). Internationalization and firm performance of SMEs: The moderating effects of CEO attributes. Journal of World Business, 48(1), 1-12. https://doi.org/10.1016/j.jwb.2012.06.001
Jang, S., & Park, K. (2011). Inter-relationship between firm growth and profitability. International Journal of Hospitality Management, 30(4), 1027-1035. https://doi.org/10.1016/j.ijhm.2011.03.009
Kachlami, H., & Yazdanfar, D. (2016). Determinants of SME growth: The influence of financing pattern. An empirical study based on Swedish data, Management Research Review, 39(9), 966-986. https://doi.org/10.1108/MRR-04-2015-0093
Kirzner, I. M. (1979). Perception, opportunity and profit. Chicago: University of Chicago Press.Lee, S. H., Beamish, P., Lee, H. U., & Park, J. H. (2009). Strategic choice during economic crisis: Domestic market position, organizational capabilities and export flexibility. Journal of World Business, 44(1), 1-15. https://doi.org/10.1016/j.jwb.2008.03.015
Lee, S. (2014). The relationship between growth and profit: evidence from firm-level panel data. Structural Change and Economic Dynamics, 28(March), 1-11. https://doi.org/10.1016/j.strueco.2013.08.002
Lee, S. (2018). Growth, profits and R&D investment. Economic Research, 31, 607-625. https://doi.org/10.1080/1331677X.2018.1432380
Lööf, H., & Heshmati, A. (2006). On the relationship between innovation and performance: A sensitivity analysis. Economics of Innovation and New Technology, 15(4-5), 317-344. https://doi.org/10.1080/10438590500512810
Markman, G. D., & Gartner, W. B. (2002). Is extraordinary growth profitable? A study of Inc. 500 high-growth companies. Entrepreneurship Theory and Practice, 27(1), 65-75. https://doi.org/10.1111/1540-8520.t01-2-00004
Moscarini, G., & Postel-Vinay, F. (2012). The Contribution of large and small employers to job creation in times of high and low unemployment. American Economic Review, 102(6), 2509-2539. https://doi.org/10.1257/aer.102.6.2509
Mueller, D. C. (Ed.) (1990). Dynamics of Company Profits: An International Comparison. Cambridge: Cambridge University Press.
Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417-1426. https://doi.org/10.2307/1911408
Pangarkar, N. (2008). Internationalization and performance of small- and medium-sized enterprises. Journal of World Business, 43, 475-485. https://doi.org/10.1016/j.jwb.2007.11.009
Pattitoni, P., Petracci, B., & Spisni, M. (2014). Determinants of profitability in the EU-15 area. Applied Financial Economics, 24(11), 763-775. https://doi.org/10.1080/09603107.2014.904488
Penrose, E. T. (1959). The theory of the growth of the firm. New York. NY: John Wiley.
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