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ABSTRACT
This paper provides an empirical investigation of the impact of market orientation on firms' economic performance during the period 1998–2012 using a panel of Italian manufacturing firms. We introduce a dynamic concept of market orientation, in that we define a market-oriented firm as one that persistently undertakes product and marketing innovation, while at the same time introducing organizational changes and training efforts to manage and improve its knowledge assets over the long term. This notion of market orientation is therefore crucially related to the so-called dynamic capability approach. The related empirical model shows that being a market-oriented firm significantly affects profitability, in a framework in which this latter is simultaneously estimated with productivity, thus allowing for more precise estimates of the profit premium which is earned accordingly.
Acknowledgements
The authors would like to thank seminar participants at the Warwick Business School, University of Warwick, the Department of Economic and Social Sciences, Università Cattolica del Sacro Cuore, and the EARIE conference. Comments of two anonymous referees contributed to improve significantly the paper. Needless to say, the usual disclaimers apply.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 In other words, following Menguc and Auh (Citation2006) and Barrales-Molina, Martínez-López, and Gázquez-Abad (Citation2014), absorptive capacity and knowledge management are crucial components of dynamic capabilities, and this definition does incorporate such abilities.
2 We are aware of the fact that profitability may not be assumed as the crucial target by companies, in particular, if they compete in international markets. Indeed, the literature on the role played by marketing within the strategic behaviour of Japanese companies during the 1990s Genestre, Herbig, and Shao (Citation1995) and Jacobs and Herbig (Citation1998) emphasizes how marketing is a means to increase a firm's market share. Japanese firms typically compete in international markets, and therefore they are committed explicitly to gaining, maintaining and expanding market share around the world. On the contrary, profitability is a primary target for the US businesses, and marketing strategy varies accordingly. As concerns our empirical specification, we think that it represents well the behaviour of Italian companies which are characterized by a significantly smaller size and market power. Thus they typically compete in international markets to increase their revenues and therefore profitability.
3 The Micro-Manu dataset is a result of collaboration between the Italian National Institute of Statistics (ISTAT, Regional office for Lombardy) and the Catholic University of the Sacred Hearth. We would like to thank Valerio Fiorespino, Roberto Monducci, Giovanni Barbieri e Rosalia Coniglio of the Italian National Institute of Statistics (ISTAT) for providing access to the data.
4 This archive is the most relevant administrative register used by ISTAT as the basis for many sample surveys and even census investigations.
5 A characteristic that merits attention is that the measurement of the degree of innovation persistence may be over-estimated when two consecutive waves are partially overlapped.
6 We acknowledge a seminar participant for suggesting this alternative solution. In a previous version of this work, we used a balanced panel of the first three CIS waves and, thus, a reduced number of observations. With the availability of an additional CIS wave for the period 2010–2012, we could add the ‘0111’ pattern that were not available at time of the previous version of this work.
7 If one compares the CIS sample distribution by size-class relative to the period 2006–2008 with the distribution obtained when firm-level accounting information is added, the results show a reduction from 64% to 56% of firms in the first class (firms less than 50 employees) and accordingly an increase in both the second class (firms between 50 and 250 employees; + 5 percentage points) and the third class of medium-large firms with more than 250 employees (+3 percentage points).
8 We use two digit industry deflators to take into account the effect of price changes. We consider only variations in productivity that depends on labour efficiency and not on price changes that may therefore reflect customers' willingness to pay.
9 It is worth noting that one can observe a strong correlation (0.81 on average) between investment in machinery and equipment and process innovation according to the evidence available from the CIS surveys.
10 Otherwise a different modelling strategy should have been applied, i.e. focusing only on innovative firms or using a Tobit model with a selection equation. This approach, however, is beyond the scope of our investigation, which aims at pinpointing the different behaviour and performance of innovative and noninnovative firms.
11 It should be noted that the association between the variables reflecting each type of innovative behaviours considered is high as testified by the tetrachoric correlation coefficients: product innovation-organizational innovation: 0.51; marketing innovation-product innovation: 0.52; marketing innovation-organizational innovation: 0.61; training for innovation-product innovation: 0.73; training for innovation-organizational innovation 0.46; training for innovation-marketing innovation: 0.47.
12 Indeed, after some experimentations the international group dummy variable enters significantly only the productivity equation. It is also worthwhile to note that the weight of multinational enterprises (MNE) within our sample of firms is very low. Therefore, the impact of diversified fiscal rules on the profitability of firms belonging to international groups may be ruled out without any loss of generality.
13 The use of an operating measure of profitability may be rationalized on the grounds that we aim at pinpointing the relationship between innovative activity and a firm's core business. Other measures of firms' profitability (e.g. ROA, ROE) are strongly influenced by financial returns that, first, are not directly related to the core business and, second, may crucially depend on the economic valuation of total assets that in many cases may be biased.
14 The corresponding LM test is as follows: (1 d.f.).
15 We use a 3SLS random effect estimators. This choice can be justified on the grounds that the RE specification enables one to control for the effect of time-invariant variables such as regional areas and industrial sectors, and also the market orientation variable. In addition, when the target population is large, and the selected sample may not be fully representative regarding all the characteristics under investigation, it may be preferable to adopt a random effect model as it allows for a generalization of the inferences beyond the sample used in the model.
16 Technological capabilities, marketing capabilities and market orientation (defined on a persistent basis) are only partially simultaneous with respect to economic variables (e.g. profitability) and thus may be considered as partially predetermined. Also, they may be regarded as a firm's structural characteristic, given the definition we have adopted which entails a persistent attitude. In our investigation, the focus is on the estimation of productivity and profitability in a simultaneous equation framework, given firms' managerial capabilities. The endogenization of this latter would have required a different data set, more focused on managerial attitudes and evaluations, and also the use of specific measurement scale allowing for a better classification of dynamic capabilities (see for example Barrales-Molina, Bustinza, and Gutiérrez-Gutiérrez Citation2013). In addition it is worth recalling that Hall, Foray, and Mairesse (Citation2007) use lags on innovation intensity proxied by R&D intensity to explain firm performance in a sample of US companies. Innovation intensity is treated as predetermined, thus avoiding simultaneity bias. Also, our approach is consistent with the hypotheses suggested by Roach et al. (Citation2018), in that innovativeness positively affect firm performance, where the former is defined in terms of marketing and technical integration together with market orientation.
17 See Myers and Majluf (Citation1984) for a discussion on the role of internal resources in affecting firms' investment decision according to the pecking order theory.
18 The whole descriptive statistics dealing with the panel data set used for the present econometric estimation may be downloaded from http://www.istat.it/archivio/111638.
19 A simple test (z test; z=2.44) on coefficient equality indicates that the difference in the two estimated coefficients in column (1) and (3) is statistically significant, see Paternoster et al. (Citation1998) and Clogg, Petkova, and Haritou (Citation1995).