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Inside the Virtuous Cycle between Productivity, Profitability, Investment and Corporate Growth: An Anatomy of China Industrialization

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  • Xiaodan Yu
  • Giovanni Dosi
  • Marco Grazzi
  • Jiasu Lei

Abstract

This article explores the dynamics of market selection by investigating of the relationships linking productivity, profitability, investment and growth, based on China's manufacturing firm-level dataset over the period 1998-2007. First, we find that productivity variations, rather than relative levels, are the dominant productivity-related determinant of firm growth, and account for 15%-20% of the variance in firms' growth rates. The direct relation between profitability and firm growth is much weaker as it contributes for less than 5% to explain the different patterns of firm growth. On the other hand, the profitability-growth relationship is mediated via investment. Firm's contemporaneous and lagged profitabilities display positive and significant effect on the probability to report an investment spike, and, in turn, investment activity is related to higher firm growth.

Suggested Citation

  • Xiaodan Yu & Giovanni Dosi & Marco Grazzi & Jiasu Lei, 2015. "Inside the Virtuous Cycle between Productivity, Profitability, Investment and Corporate Growth: An Anatomy of China Industrialization," LEM Papers Series 2015/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    • Handle: RePEc:ssa:lemwps:2015/03
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    Cited by:

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    2. Luna, Ivette & Hiratuka, Celio & Haddad Netto, Elias Youssef, 2016. "Survival of the fittest or does size matter: What are the main drivers of Productivity in Brazil?," MPRA Paper 78208, University Library of Munich, Germany, revised 2016.

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    More about this item

    Keywords

    Productivity; Market selection; Profitability; Investment spike; Firm growth; Chinese economy;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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