Dynamics of Firm Profitability and Growth: Do Knowledge-Intensive (Business) Services Persistently Outperform?

Abstract

This paper explores the persistence of profitability and growth for firms operating in the Greek service sector, paying special attention to knowledge-intensive services (KIS) and knowledge-intensive business services (KIBS). The generalized method of moments is used on a rich panel of firms over a recent nine-year period. Quantile regressions are complementarily applied for KIS and KIBS industries. The key results from both growth and profit dynamics suggest that firms in KIS and KIBS industries persistently outperform firms in less knowledge-intensive service industries, pointing to strategic advantages of the former. Importantly, KIS and KIBS seem to be able to sustain their growth and profitability persistent trends even in times of crisis. Further insight into these issues is provided by the quantile analysis, the exploration of the profitability and growth inter-linkages, and the investigation of differences among various size groups in KIS and KIBS.

Key Words:

• Firm Dynamics
• Gibrat’s Law
• Growth Autocorrelation
• Persistence of Profitability
• Knowledge-Intensive (Business) Services
• Strategy.

JEL classifications:

• L10
• L25
• L80.

I would like to thank Alexandra Kontolaimou from the National Technical University of Athens, Aggelos Tsakanikas from IOBE, Vasiliki Chatzikonstanti from the University of Patras and two anonymous referees for their useful comments and suggestions. The views expressed in this paper are those of the author and do not necessarily reflect the views of the Foundation for Economic and Industrial Research (IOBE).

Notes

1. For a detailed discussion of these inter-linkages, see Davidsson, Achtenhagen, and Naldi (2007).

2. This is an unbalanced data set comprising surviving, entering, and exiting firms.

3. For a detailed discussion of this issue, see Davidsson Achtenhagen, and Naldi (2007, 2010).