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Testing the principle of `growth of the fitter': The relationship between profits and firm growth

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  • Coad, Alex

Abstract

In this study, we test the evolutionary principle of "growth of the fitter." Previous studies suggest that growth does not discriminate between firms according to their fitness when this latter is proxied by productivity. We use profits as a proxy for fitness and explore its influence on subsequent growth rates by tracking 9721 French manufacturing firms over the period 1996-2002. We overcome problems of unobserved firm-specific effects, persistence, and endogeneity by using the 'system GMM' estimator developed by Blundell and Bond (1998). Past profits have a positive effect on employment and sales growth, but a negative effect on Value-Added growth. Growth, on the other hand, has a strong effect on profits, which suggests that dynamic increasing returns to firm growth dominate potential "Penrose effects."

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Bibliographic Info

Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 18 (2007)
Issue (Month): 3 (September)
Pages: 370-386

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Handle: RePEc:eee:streco:v:18:y:2007:i:3:p:370-386

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Web page: http://www.elsevier.com/locate/inca/525148

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  1. Alex Coad & Rekha Rao, 2007. "Innovation and Firm Growth in High-Tech Sectors: A Quantile Regression Approach," Open Discussion Papers in Economics 57, The Open University, Faculty of Social Sciences, Department of Economics.
  2. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
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  4. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
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  6. Alex Coad, 2007. "A Closer Look at Serial Growth Rate Correlation," Review of Industrial Organization, Springer, vol. 31(1), pages 69-82, August.
  7. Giulio Bottazzi & Giovanni Dosi & Marco Lippi & Fabio Pammolli & Massimo Riccaboni, 2001. "Innovation and Corporate Growth in the Evolution of the Drug Industry," LEM Papers Series 2001/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  8. Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series, in: Yale Economic Essays, pages 225-272 Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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  10. Giulio Bottazzi & Alex Coad & Nadia Jacoby & Angelo Secchi, 2005. "Corporate Growth and Industrial Dynamics: Evidence from French Manufacturing," LEM Papers Series 2005/21, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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  13. Alex Coad & Rekha Rao, 2006. "As luck would have it : innovation and market value in "complex technology" sectors," Cahiers de la Maison des Sciences Economiques r06069, Université Panthéon-Sorbonne (Paris 1).
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  17. Baily, Martin Neil & Bartelsman, Eric J & Haltiwanger, John, 1996. " Downsizing and Productivity Growth: Myth or Reality?," Small Business Economics, Springer, vol. 8(4), pages 259-78, August.
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  21. Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
  22. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
  23. Machiel van Dijk & Önder Nomaler, 2000. "Technological Diffusion Patterns and their Effects on Industrial Dynamics," DRUID Working Papers 00-6, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  24. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
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