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.
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.