Firm Growth, Panel VAR, Employment Growth, Industrial Dynamics, Productivity Growth

C30, D20, L25, L20

We propose a multidimensional empirical analysis of the growth processes of firms, focusing on the coevolution of employment growth, sales growth, growth of profits and labour productivity growth. Based on firm level data about Italian manufacturing firms, 1989-1997, we apply a reduced-form vector autoregression model to analyze the lead-lag associations between the different dimension of firm growth. Findings suggest that employment growth precedes sales growth and growth of profits, and that sales growth is also associated with subsequent profits growth. There appears to be little feedback of either sales or profits on employment growth, however, and there is no clear association of employment, sales or profits growth with subsequent changes in labour productivity. Productivity growth, in turn, is more strongly associated with subsequent growth of profits than it does with subsequent growth of either employment or sales. Growth of profits, therefore, tends to represent the absorbing dimension of the overall processes of firm growth. Quantile regressions reveal asymmetries between growth processes for growing and shrinking firms.