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

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  • Alex Coad

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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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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0531.

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Date of creation: Nov 2005
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Handle: RePEc:emo:wp2003:0531

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  2. Alex Coad, 2007. "A Closer Look at Serial Growth Rate Correlation," Review of Industrial Organization, Springer, vol. 31(1), pages 69-82, August.
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  9. 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.
  10. 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.
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  15. 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.
  16. 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.
  17. 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).
  18. 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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