On the labor-managed firm in a competitive environment

A risk-neutral median voter in a labor-managed firm (LMF) facing an increase in the demand for its product will prefer to maintain employment and secure his job to the prospect of a higher dividend accompanied by the risk of unemployment. It is argued that LMFs with fixed employment and output will lose out in competition with flexible-output profit maximizing firms. Partnerships with a small membership in high-human-capital industries will be most likely to survive in a competitive environment.     

The business environment and Moroccan firm productivity

The paper focuses on the role of the business environment in understanding differences in the total factor productivity of Moroccan firms. The business environment is captured by measures which include the investment climate in which firms operate, i.e. access to credit, regulatory and institutional environment and infrastructure. The evidence on the relationship between credit and productivity is strongly indicative of credit resources misallocation in Morocco. We also find that, heavier bureaucracy and differences in regulations appear to have a negative effect on firm productivity. This last result is particularly relevant for small firms, and/or those that do not export and/or those with no access to foreign capital.     

The joint effects of financial development and the business environment on firm growth: Evidence from Vietnam

This work examines the complementary effects of local financial development and the business environment on the growth of Vietnamese firms. For the period from 2009 to 2013, we combine firm-level data covering more than 40,000 firms from the Vietnam Enterprise Survey with province-level data from the Vietnam Provincial Competitiveness Indicators. Our estimation strategy builds upon a novel copula-based estimator that accounts for potential endogeneity biases without requiring external instruments. Our results show that financial development and a favourable business environment generally promote firm growth, but some components of the business environment, such as low entry costs, access to land and business service support, foster firm growth more strongly than financial development. Most importantly, financial development and the business environment interact positively in their effects on firm growth. The impact of local financial development on firm growth is higher in provinces with a competitive business environment. Conversely, improvements in provincial competitiveness have a greater impact on firm growth in provinces with a more developed financial sector. The results clearly show that policies to promote local financial development need to be coordinated with measures to improve the broader business environment.     

How corporate cultures coevolve with the business environment: The case of firm growth crises and industry evolution

This paper shows how cognitive human dispositions that take effect at the level of an individual firm's corporate culture have repercussions on an industry's evolution. In our theory, the latter is attributable to evolving corporate cultures coupled with changes in a firm's business environment. With the help of a formal model of evolving corporate cultures, we demonstrate how firms can establish a cooperative cultural regime that yields competitive advantages in an innovative, fast changing environment. Depending on within-firm social learning processes and cognitive constraints of human agents, organizations then reach a critical cognitive firm size in their development beyond which the level of cooperation deteriorates rapidly—they systematically face a growth crisis. Organizations successful in such an environment and reaching a critical technological size may, however, reap economies of scale in a later, mature and stable business environment with altered corporate culture. Furthermore, we relate these findings to empirical evidence on firm survival and performance in different industries, the evolution of organizational structures, and technological advancements in production technologies, and we identify some determinants of market structures.     

The firm demand for liquid assets in an inflationary environment

Measures of inflation and the price level are added to the standard model of liquid asset demand and estimated with cross-section data on Brazilian manufacturing firms over a four-year period characterized by substantial inflation (annual rates of 19, 23, 34 and 35%). Results indicate that economies of scale exist in a model that is stable over time. Interest rates have a strong and elastic impact on liquid asset demand when inflation is explicitly controlled for although this result is not consistent across all subsets of data used. The usual assumption of a unitary price level elasticity of liquid asset demand is rejected and firms appear to conserve on liquid asset holdings as the rate of inflation increases suggesting more careful management of payments flows. Some of these findings contradict those of Ungar and Zilberfarb (1980). There are also some difference in behaviour across ownership groups: Brazilian firms do not exhibit economies of scale while multinationals do; and Brazilian firms adjust actual to desired balances faster than multinational firms.     

Regret theory and the banking firm: The optimal bank interest margin

This paper examines the optimal bank interest margin, i.e., the spread between the loan rate and the deposit rate of a bank, when the bank is not only risk-averse but also regret-averse. Regret-averse preferences are characterized by a utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the presence of regret aversion raises or lowers the optimal bank interest margin than the one chosen by the purely risk-averse bank, depending on whether the probability of default is below or above a threshold value, respectively. Regret aversion as such makes the bank less prudent and more prone to risk-taking when the probability of default is high, thereby adversely affecting the stability of the banking system.     

Sub-national differentiation and the role of the firm in optimal international pricing

We illuminate the relationship between optimal firm pricing and optimal trade policy by exploring a generalized model that accommodates product differentiation at both the national and sub-national (firm) levels. We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their terms of trade through trade distortions, because firms play an important preemptive role in optimally pricing unique varieties. We contrast this with standard applications of perfect-competition Armington models, which exhibit high optimal tariffs—even for relatively small countries.     

Trade and firm heterogeneity in a Schumpeterian model of growth

The present paper explores the effect of trade liberalization on the level of productivity as well as the rate of productivity growth in an R&D-based model with heterogeneous firms. We introduce new and plausible features that are absent in existing studies. First, technical progress takes the form of continual quality improvement of products over time. Second, firm entry and exit are endogenously determined due to creative destruction of products. In this framework, we demonstrate that a lower transport cost or export sunk cost unambiguously reallocates resources to R&D and top-quality product industries from low-quality good industries. This means that trade liberalization increases the rate of technical progress as well as the level of manufacturing productivity. These results are found to be robust in an extended model with population growth without scale effects.     

The firm information environment and capital structure: international evidence

This article investigates the effect of the firm information environment, characterized by the analyst characteristics, on firms’ capital structure choices and whether this effect varies according to country-level institutional environments. Using a comprehensive international data set that covers 19 939 firms across 41 countries between 2000 and 2010, we document two key findings. First, firms with lower analyst coverage, higher forecast dispersion and higher forecast errors have higher leverage. Second, the effect of the firm information environment on corporate leverage is attenuated in countries with stronger governance mechanism and better information transparency. This result suggests that a firm’s information environment is an important factor influencing its capital structure decision and that country-level institutional environments matter to this effect.     

On the relations between demand creation and growth in a monopolistic firm

This paper deals with the allocation of resources over time by a monopolistic firm between growth of the productive capacity and growth of the market-demand capacity. As the demand-creation relations follow an S-shaped curve, different phases in the behavior of the growing firm are conceived in which investment cycles occur both in productive and demand-creation activities.The paper analyzes the case of homogeneous resources as well as nonhomogeneous resources. It is shown that in general the phases in the behavior of the growing firm are preserved in both cases. In the homogeneous case, when there are investment activities in both types of capital, it is shown that the firm will allocate its resources between the two activities in such a way that the ratio of the rate of growth of demand price (with respect to demand-creation capital) and the rate of growth of output (with respect to productive capital) will be equal to one plus the reciprocal of the elasticity of demand and will, therefore, be bounded between zero and one.     

The provision of long-term credit and firm growth in developing countries

Do small and young firms benefit from an increase in the provision of long-term loans? By combining firm-level data from 62 countries (over the period 2006–2016) with a new database on short-term and long-term credit provided to the private sector, this article shows a higher provision of long-term credit does not stimulate growth of small and young firms. On the contrary, an increase in the availability of short-term credit spurs firm growth. The main explanation of this (counter-intuitive) result is the differential impact of short-term and long-term credit provision on small and young firms’ access to credit. Young and small firms are able to take advantage of an increase of short-term loans, which allow them to switch from informal finance to bank loans. However, a higher level of long-term credit does not alleviate credit constraints faced by opaque firms because these funds are allocated towards transparent borrowers.     

On the solution of a stochastic optimal growth model

This note discusses a stochastic optimal growth model in which the optimal paths can be obtained by a simple direct argument. The structural characteristics of the model are the infinite horizon, the form of the instantaneous utility function, and uncertainty as a Wiener process in a linear production constraint. The note explains that, for optimality, at each point in time a formally identical problem must be solved. This implies that the optimal saving ratio must be constant.A proof, employing the rules of stochastic calculus, that the ensuing paths are the unique globally optimal paths is also given.We are very grateful to two referees of this journal for their invaluable comments and suggestions.     

The firm as a subeconomy

This article explores the economic role of the firm in a marketeconomy. The analysis begins with a discussion and critiqueof the property rights approach to the theory of the firm asexposited in the recent work by Hart and Moore ('Property Rightsand the Nature of the Firm'). It is argued that the Hart-Mooremodel, taken literally, can only explain why individuals ownassets, but not why firms own assets. In particular, the logicof the model suggests that each asset should be free standingin order to provide maximal flexibility for the design of individualincentives. These implications run counter to fact. One of thekey features of the modern firm is that it owns essentiallyall the productive assets that it employs. Employees rarelyown any assets; they only contribute human capital. Why is theownership of assets clustered in firms? This article outlinesan answer based on the notion that control over physical assetsgives control over contracting rights to those assets. Metaphorically,the firm is viewed as a miniature economy, an 'island' economy,in which asset ownership conveys the CEO the power to definethe 'rules of the game', that is, the ability to restructurethe incentives of those that accept to do business on (or with)the island. The desire to regulate trade in this fashion stemsfrom contractual externalities characteristic of imperfect informationenvironments. The inability to regulate all trade through asingle firm stems from the value of exit rights as an incentiveinstrument and a tool to discipline the abuse of power.     

The impact of financial constraints on firm survival and growth

We propose a new approach for identifying and measuring the degree of financial constraint faced by firms and use it to investigate the effect of financial constraints on firm survival and development. Using panel data on French manufacturing firms over the 1996–2004 period, we find that (1) financial constraints significantly increase the probability of exiting the market, (2) access to external financial resources has a positive effect on the growth of firms in terms of sales, capital stock and employment, (3) financial constraints are positively related with productivity growth in the short-run. We interpret this last result as the sign that constrained firms need to cut costs in order to generate the resources they cannot raise on financial markets.     

The existence of optimal consumption policies in optimal economic growth models with nonconvex technologies

An existence theorem for a class of continuous time infinite horizon optimal growth models is developed. The underlying technology set is not assumed to be convex, instead the “slices” of the technology set corresponding to a fixed capital stock vector are assumed convex and compact in the consumption and net investment variables. This allows consideration of the case of increasing returns to scale. Existence of an optimal capital stock and consumption policy is proved directly without consideration of the underlying Hamiltonian dynamical system that arises from applying Pontryagin's maximum principle.     

Employment growth and innovation at the firm level

We analyze the influence of innovation on growth rates of employment in 859 Dutch manufacturing firms over the period 1983–1988. Whereas the (growth of the) R&D intensity of firms has a slightly negative impact on employment, we find that firms with a high share of product-related R&D (as a proxi of R&D related to industrial activities in an early stage of the life cycle) experienced an above average growth of employment. The same holds for firms which directed their R&D towards information technology. Smaller firms have, ceteris paribus, substantially higher growth rates of employment than their larger counterparts. Against our expectations, R&D cooperation has no significant impact on employment growth. The same holds for activities in the fields of biotechnology and new materials.     

Testing the principle of ‘growth of the fitter’: The relationship between profits and firm growth

This paper is an empirical investigation of the evolutionary principle of ‘growth of the fitter’. Previous studies suggest that growth does not discriminate between firms according to their fitness, when this latter is proxied by productivity. We use the profit rate (operating surplus/value added) as a proxy for fitness and explore its influence on subsequent growth rates by tracking 8405 French manufacturing firms over the period 1996–2004. We overcome problems of unobserved firm-specific effects, persistence and endogeneity by using the ‘system GMM’ estimator developed by Blundell and Bond [Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87, 115–143]. Whilst non-parametric plots do not reveal any obvious relationship between profit rates and subsequent growth, regression analysis identifies a small positive influence. Considering the reciprocal influence of growth on profit rates, positive and significant results suggest that ‘Penrose effects’ are not a dominant feature of firm dynamics.