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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."

(This abstract was borrowed from another version of this item.)

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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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References

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  1. Giulio Bottazzi & Angelo Secchi & Federico Tamagni, 2008. "Productivity, profitability and financial performance," Industrial and Corporate Change, Oxford University Press, vol. 17(4), pages 711-751, August.
  2. 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.
  3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  4. 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.
  5. Giovanni Dosi, 2005. "Statistical Regularities in the Evolution of Industries. A Guide through some Evidence and Challenges for the Theory," LEM Papers Series 2005/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  6. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  7. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Restructuring and productivity growth in uk manufacturing," Economic Journal, Royal Economic Society, vol. 113(489), pages 666-694, 07.
  8. Giulio Bottazzi & Elena Cefis & Giovanni Dosi, 2001. "Corporate Growth and Industrial Structure. Some Evidence from the Italian Manufacturing Industry," LEM Papers Series 2001/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  9. 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.
  10. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth. Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372 National Bureau of Economic Research, Inc.
  11. Paul Geroski & Mariana Mazzucato, 2002. "Learning and the sources of corporate growth," Industrial and Corporate Change, Oxford University Press, vol. 11(4), pages 623-644, August.
  12. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  13. 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.
  14. Coad, Alex & Rao, Rekha, 2008. "Innovation and firm growth in high-tech sectors: A quantile regression approach," Research Policy, Elsevier, vol. 37(4), pages 633-648, May.
  15. Friedman, Milton, 1992. "Do Old Fallacies Ever Die?," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 2129-32, December.
  16. Mueller, Dennis C, 1977. "The Persistence of Profits above the Norm," Economica, London School of Economics and Political Science, vol. 44(176), pages 369-80, November.
  17. Steve Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  18. Martin N. Baily & Eric J. Bartelsman & John Haltiwanger, 1994. "Downsizing and productivity growth: myth or reality?," Finance and Economics Discussion Series 94-7, Board of Governors of the Federal Reserve System (U.S.).
  19. Chiaromonte, Francesca & Dosi, Giovanni, 1993. "Heterogeneity, competition, and macroeconomic dynamics," Structural Change and Economic Dynamics, Elsevier, vol. 4(1), pages 39-63, June.
  20. repec:hal:cesptp:hal-00261616 is not listed on IDEAS
  21. Alex Coad, 2006. "A Closer Look at Serial Growth Rate Correlation," LEM Papers Series 2006/29, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  22. 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.
  23. repec:hal:cesptp:hal-00642688 is not listed on IDEAS
  24. 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.
  25. Giulio Bottazzi & Alex Coad & Nadia Jacoby & Angelo Secchi, 2011. "Corporate growth and industrial dynamics: evidence from French manufacturing," Applied Economics, Taylor & Francis Journals, vol. 43(1), pages 103-116.
  26. 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.
  27. 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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