Growth processes of Italian manufacturing firms

This paper presents a multidimensional empirical analysis of firm growth. Exploiting censusdata on Italian manufacturing firms, 1989–1997, we estimate a reduced-form VAR toanalyze the co-evolution of employment growth, sales growth, growth of profits and labourproductivity growth. Our main findings suggest that (i) employment growth precedes salesgrowth; (ii) productivity growth lacks any strong association with subsequent growth ofthe other indicators; (iii) profits growth represents the ‘absorbing dimension’ of the growthprocesses. This picture contrasts with ‘accelerator models’, predicting sales are the driver ofthe growth process, and is also at odds with theories of firm-industry evolution assumingproductivity or profits advantages to be the driver of strong market selection/reallocationmechanisms. Instead, the findings reveal the existence of (weak) Penrose and (strong)Kaldor–Verdoorn effects, and more generally convey the view that employment growthis the key driver of firm expansion, while profits, once made, are not reinvested