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.