Dynacom Series | ||

Persistence in Profitability and in Innovative Activities | ||

Cefis E. | ||

Keywords | ||

persistence, innovation, patents, profitability, firm's growth | ||

Abstract | ||

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. | ||

Remarks | ||

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

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