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The heterogeneous dynamics between growth and profits: the case of young firms

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Abstract

While there is an increasing interest in the literature about the relationship between profits and business growth, the empirical evidence is mixed and inconclusive. This can be explained by the difficulty of fully addressing the complex nature of this relationship. Building on resource-based and evolutionary considerations, the present study investigates the dynamics between growth and profits of young firms by explicitly considering the endogeneity and heterogeneity aspects of the relationship. Data are based on a cohort of Spanish manufacturing firms tracked during the period 1996–2010. The results indicate that young firm growth has a positive impact on profits. In contrast, the effect of profits on growth is not significant. Neither is there a significant correlation between past and current growth. Importantly, we find that the results are strongly influenced by inter-firm heterogeneity. Implications from these findings are discussed.

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Notes

  1. For a deeper discussion of the properties of GMM estimators, see Bond (2002) and Roodman (2006, 2009).

  2. Although we recognize that the whole idea of Granger causality that underlies Hurlin’s approach may be criticisable, we consider this test to be of particular importance for testing the existence of inter-firm heterogeneity in the profit–growth relationship.

  3. A full detailed discussion of the asymptotic properties of the average Wald statistic for fixed T samples can be seen in Hurlin (2007) and Dumitrescu and Hurlin (2012).

  4. In order to check for the external an internal validity of this sample, we estimate several tests for proportions (z test) comparing this sample with the initial population drawn from the SABI© registers, the Spanish National Firms Registry (Directorio Central de Empresas) and other comparable statistics on the manufacturing sectors in other EU countries and the US. In all these cases, only few significant differences were found. These tests and tables are not reported here but they are available from the authors under request.

  5. In this case, we use firm AGE instead of YEAR dummies because as Hurlin´s test performs one single equation for each firm, we only have 14 observations, so we do not have enough degrees of freedom to include 14 dummy variables, one for each year. Therefore, we include AGE, which is a variable that controls almost for the same effect of the YEAR dummies since we are dealing with only one cohort.

  6. This idea was suggested by Dr. Walter Sosa Escudero. However, mistakes and omissions remain our responsibility

  7. We thank an anonymous reviewer for this suggestion.

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Acknowledgments

We want to express our gratitude to Luis Trajtenberg, Gabriel Montes-Rojas and Walter Sosa Escudero for their useful comments on the econometric analysis. Also, we want to thank Christophe Hurlin, Erkan Erdil and Irwin Morris for sharing their routines and commands, and the attendees at the SIDPA Seminar—Faculty of Economics, University of Buenos Aires for their valuable comments. We appreciate the support from Associate Editor Alexander Kritikos and the valuable comments from two anonymous referees. Support from the Spanish Ministry of Science and Technology is also acknowledged (Project ECO2010-21242-C03-01). The authors are jointly responsible for the work. The usual disclaimer applies.

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  1. Entrepreneurial Development Programme (PRODEM), Institute of Industry, Universidad Nacional de General Sarmiento, J.M. Gutierrez 1150, 1663, Los Polvorines, Buenos Aires, Argentina

    Juan S. Federico

  2. Department of Business, Universitat Autònoma de Barcelona, 08193, Bellaterra, Cerdanyola del Vallès, Spain

    Joan-Lluis Capelleras

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Correspondence to Juan S. Federico.

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Federico, J.S., Capelleras, JL. The heterogeneous dynamics between growth and profits: the case of young firms. Small Bus Econ 44, 231–253 (2015). https://doi.org/10.1007/s11187-014-9598-9

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