The anatomy of costs and firm performance: Evidence from Belgium

We separately observe variable input expenditure and expenditure on fixed inputs and overhead in novel firm-level data covering the Belgian manufacturing sector over the last decades. This permits a deeper investigation of two potential drivers of the globally observed widening gap between firms’ revenue and variable input expenditure: technology and market power. Across the board, cost structures have become less reliant on variable input expenditure over time, while expenditure on fixed inputs and overhead costs have increased in prominence. We relate these changes in firms’ cost structures to performance measures and document that markups and gross profit ratios increase substantially as the role of variable costs in production diminishes. Profit ratios net of fixed input expenditure also increase, but by substantially less than gross profit ratios. Our results suggest that technological change can explain a considerable portion of the widening gap between revenue and variable input expenditure, but that markups increase by somewhat more than necessary to break even. Moreover, this phenomenon operates remarkably similarly across different firms and industries.