Conference Publication Details
Mandatory Fields
Ipinnaiye O, Dineen, D and Lenihan, H
37th ISBE Annual International Conference
Institute for Small Business and Entrepreneurship conference
2014
Published
()
Optional Fields
Manchester UK
05-NOV-14
06-NOV-14

    Modelling the determinants of firm performance: A holistic and multivariate approach

Objective:
This paper examines drivers of firm growth and productivity using a holistic multivariate model which relates firm performance to its internal (firm-level characteristics and firm strategy) and external (macroeconomic environment) determinants. A key emphasis is placed on the comparatively neglected role of the macroeconomic variables.

Prior Work: Firm performance is important for a number of reasons related to job creation, firm survival, innovation, competiveness and overall economic performance; motivating a large body of research on its determining factors. There exists a lacuna in relation to the effect of the macroeconomic environment on firm performance in general, but particularly within a holistic multivariate approach. 

Approach: Using data for 2,200 manufacturing and services firms in Ireland over the period 1991-2007, we use System Generalised Method of Moments estimations to address possible endogeneity; while multiple firm performance measures are employed to allow for the multidimensionality of firm performance. Our dataset tracks the performance of firms during an export-led growth phase (1991-2000) and a credit-led domestic demand-driven growth phase (2001-2007) in the Irish economy.

Results: We find that firm performance is influenced by changes in the macroeconomic environment across the two discrete growth periods, with manufacturing firms showing higher turnover and productivity performance during the export-led growth phase. The effect of firm strategy is moderated by macroeconomic conditions, with the positive growth effect of strategies such as trade and training becoming more pronounced in the credit-led consumer demand-driven growth period. Additionally, our results provide evidence in support of small firms as important sources of employment and turnover growth.  Moreover, we find that the firm’s starting quality in terms of initial productivity is critical to its subsequent performance.

Implications: Our results highlight the need for a holistic multivariate modelling approach which takes cognisance of the internal and external factors influencing firm performance, as well as possible endogeneity issues. Studies of firm performance which do not adopt such a holistic approach run the risk of “specification bias”. Our findings suggest a role for policy which not only supports small indigenous firm development and sustainable macroeconomic growth, but also acknowledges the multidimensionality of firm performance.

Value: In developing a holistic multivariate model which links firm performance to firm-specific characteristics, firm strategy and macroeconomic factors, we contribute to the scant literature on the impact of the macroeconomic environment on firm performance by providing empirical evidence that the macroeconomic environment (together with several firm characteristics) does influence firm performance.  Additionally, the current research provides insights as to the channels through which this occurs (through strategies adopted by firms) - thus addressing both the ‘what’ and the ‘how’ of this interaction. 

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