Corporate performances and market selection: some comparative evidence

Diverse theories of industry dynamics predict heterogeneity in production efficiency to be the driver of firms ’ growth, survival and industrial change, either through a direct link between efficiency and growth, or through an indirect effect via profitabilities, as more productive firms can enjoy higher profit margins which, under imperfect capital markets, allow them to invest and grow more. Does the empirical evidence bear such predictions? This paper explores the dynamics of selection and reallocation through an investigation of the productivity-profitability-growth relations at the firm level. Exploiting large panels of Italian and French industrial firms, we find that heterogeneity in efficiencies primarily yield persistent profitability differentials, whereas the relationships of corporate growth with either productivity or profitability appear much weaker, if at all existent. This suggests that selection forces are much less strong than usually assumed. The results robustly applies across different industrial sectors and across the two countries