The sources of heterogeneity in firm performance: Lessons from Italy

An extensive literature documents large and persistent within-industry heterogeneity of firm performance. While some authors explain such evidence in terms of factor misallocation, we provide an alternative framework that is based on the interaction among exogenous and endogenous factors. Exogenous factors, both supply and demand-related, define the opportunity set that is available to firms. Endogenous factors reflect instead firm-specific interpretations of such set, which combined with the available resources and capabilities determine firm’s strategic responses that can be markedly heterogeneous. Whenever the diversity of firm conducts is associated with relatively small profit differentials, firm heterogeneity can persist. Evidence based on the evolution of labour productivity and profit dispersion in the Italian manufacturing sector between the 1990s and early 2000s provides support for our interpretative framework.