Testing the Principle of "Growth of the Fitter": The Relationship between Profits and Firm Growth

By Alex Coad. 2005

223 citations recorded by the source corpus.

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."

Subfields: Economics and Econometrics, Management of Technology and Innovation

View Paper: https://www.semanticscholar.org/paper/7495ad89fbf6562ebebf16e1e13c0f22f851e4ce

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Citations in the corpus

Determinants and Dimensions of Firm Growth (2009, unknown): “Coad (2007) argues that financial performance can be expected to correspond to firm growth given the principle of ‘growth of the fitter’ from evolutionary theory.”
Firm Growth : a Survey (2007, unknown): “Coad (2005) analyzes a large sample of French manufacturing firms and observes that growth is associated with short-lived increases in profit rates, whether growth is measured in terms of employment, sales, or value added.”
Untangling the relationships among growth, profitability and survival in new firms (2013, unknown): “To begin with, empirical research has to date not been able to adequately mitigate the statistical problems arising from the heterogeneous and dynamic picture of growth (Coad, 2007).”
Firm Growth: Empirical Analysis (2010, background): “Right: distribution of employment growth rates of French manufacturing firms (Coad, 2007a).”
Innovation and firm growth in high-tech sectors: A quantile regression approach (2008, methodology): “a similar database and the methodology is described in detail in Coad and Rao (2006b). The results are presented in Figure 10.”
The moderating influence of financial literacy on the relationship between access to finance and firm growth in Ghana (2016, background): “Indeed, research on SMEs’ growth is not scarce (e.g. Coad 2007; Davidsson and Wiklund 2000; Storey 1994; Wiklund, Patzelt, and Shepherd 2009; ).”
Firm growth and R&D expenditure (2010, background): “This was observed by Bottazzi et al. (2008) and is explored in Coad (2007a).”
Productivity, profitability and financial performance (2008, background): “(2004) and Coad (2007). Productivity, profitability, and financial performance 13 of 41”
Corporate performances and market selection. Some comparative evidence (2010, background): “One of the few such attempts (Coad, 2007) does not find any robust association between profitabilities and subsequent growth.”
An Assessment of Resource-Based Theorizing on Firm Growth and Suggestions for the Future (2018, background): “There has been more substantial treatment of adjustment costs slowing down the rate of firm growth, which is referred to as “the Penrose Effect” in the economics literature (e.g., Coad, 2007; Geroski, 2000; Shen, 1970; Tan & Mahoney, 2007).”
Age and firm growth. Evidence from three European countries (2013, background): “…a measure of firm profitability (ratio of EBITDA to sales), in order to control for the possibility that firms grow by re-investing higher earnings (Coad, 2007; Bottazzi et al., 2008), and a measure of the cost of labor per employee which should partially capture the effect of the endowment of…”