Dynacom Series

Persistence in Profitability and in Innovative Activities
Cefis E.
persistence, innovation, patents, profitability, firm's growth

The aim of the paper is to see whether there is a relationship
between the strong inertia of firm profits and the persistence
in innovation activities. In other words, the purpose is to
investigate whether there is persistence in innovation and
profitability considered jointly, at the firm level. The analysis
is based on a balanced panel of 82 UK manufacturing firms observed
continually throughout the period 1978 to 1991. We implement
a non-parametric approach based on directly modelling the dynamics
of the evolving cross-section distributions to analyse intra-distribution
mobility and persistence of the firms' innovative activities
and profitability. This alternative methodology uses discrete
Markov chains to approximate and estimate a law of motion for
the evolving distribution. Taking into account separately patents
and profits distributions points out that, at the firm level,
there is high persistence in both dimensions. The result suggests
that the mobility in a firm's relative position is likely in
the long run, while a strong inertia drives the dynamics in
the short run. The analysis of the joint distributions gives
a very similar picture: firms which are systematic innovators
and earn profits above the average have a high probability to
keep innovating and earning profits above the average, as well
as firms which are occasional innovators and earn profit below
the average have a high probability to remain in the initial situation.
Finally, the mobility in a firm's relative position with respect
to the average profitability appears not to be correlated with
the firm's relative position in the innovation dimension in
the short run. However, firm's relative position in the innovation
dimension matters in the long run: the probability to earn profits
above the average, in the long run, is higher if a firm starts
as a systematic innovator than as an occasional innovator.

First draft. Appearing also in "Quaderni del Dipartimento di Scienze Economiche, Anno 1999 N. 6, University of Bergamo, Italy"

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