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Do capacity constraints trigger high growth for enterprises?

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  • Coad, Alexander
  • Domnick, Clemens
  • Flachenecker, Florian
  • Harasztosi, Peter
  • Janiri, Mario Lorenzo
  • Pál, Rozália
  • Teruel Carrizosa, Mercedes

Abstract

High-Growth Enterprises (HGEs) have a large economic impact, but are notoriously hard to predict. Previous research has linked high-growth episodes to the configuration of lumpy indivisible resources inside firms, such that high capacity utilisation levels might stimulate future growth. We theorize that firms reaching critically high capacity utilisation levels reach a 'trigger point' involving either broad-based investment in further growth, or shrinking back to previous levels. We analyse EIBIS survey data (matched to ORBIS) which features a question on time-varying capacity utilisation. Overcapacity is a transitory state. Firms enter into overcapacity after a period of rapid growth of sales and profits, and the years surrounding overcapacity have higher employment growth rates. Firms operating at overcapacity make incremental investments (e.g. capacity expansion, process improvements, and modern machinery) rather than investing in R&D and new product development. We find support for the 'fork in the road' hypothesis: for some firms, overcapacity is associated with launching into massive investments and subsequent sales growth, while for other firms, overcapacity is negatively related to both investments and sales growth.

Suggested Citation

  • Coad, Alexander & Domnick, Clemens & Flachenecker, Florian & Harasztosi, Peter & Janiri, Mario Lorenzo & Pál, Rozália & Teruel Carrizosa, Mercedes, 2021. "Do capacity constraints trigger high growth for enterprises?," EIB Working Papers 2021/08, European Investment Bank (EIB).
    • Handle: RePEc:zbw:eibwps:202108
    DOI: 10.2867/20387
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    Cited by:

    1. Coad, Alexander & Amaral-Garcia, Sofia & Bauer, Peter & Domnick, Clemens & Harasztosi, Péter & Pál, Rozália & Teruel, Mercedes, 2022. "Investment expectations by vulnerable European firms: A difference-in-difference approach," EIB Working Papers 2022/04, European Investment Bank (EIB).
    2. Julie Ann Elston & Alois Weidinger, 2023. "An empirical examination of firm growth in the MENA region through the lens of Gibrat’s law," Small Business Economics, Springer, vol. 60(1), pages 121-131, January.
    3. Alex Coad & Sofia Amaral-Garcia & Peter Bauer & Clemens Domnick & Peter Harasztosi & Rozália Pál & Mercedes Teruel, 2023. "Investment expectations by vulnerable European firms in times of COVID," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 13(1), pages 193-220, March.
    4. Teruel, Mercedes & Amaral-Garcia, Sofia & Bauer, Péter & Coad, Alexander & Domnick, Clemens & Harasztosi, Péter & Pál, Rozália, 2022. "COVID-19 and the resilience of European firms: The influence of pre-crisis productivity, digitalisation and growth performance," EIB Working Papers 2022/13, European Investment Bank (EIB).

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    More about this item

    Keywords

    High-Growth Enterprises (HGEs); firm growth; investment; capacity utilisation; trigger points;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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