chapter  4
22 Pages

Innovation, growth and survival of Spanish manufacturing firms

BySILVIANO ESTEVE - PÉREZ , FABIO PIERI AND

This chapter explores the relationship between firm innovation, growth and survival. In fact, growth and survival of firms should be considered as fairly related phenomena. On the one hand, growth may be thought of as being the channel through which market selection operates in the short term via a reallocation of market shares to the most efficient firms; on the other hand, firms’ survival may be the result of a (medium-) long-run process of selection of firms, where either firms exhibit ‘acceptable’ performance as time passes, or they lose the major part of their profits, finally exiting the market. The relationship between firms’ growth and survival may be shaped by industry-specific characteristics, mostly related to the nature of dominant technology in the industry. From a static point of view, scale economies are relevant: industries characterized by large economies of scale should show higher post-entry growth rates (of survivors), because firms which do not grow should suffer the most – in terms of cost inefficiencies – for the gap between current size and the minimum efficient scale

(MES). In a dynamic perspective, the very ‘nature’ of innovation should be taken into account: both growth and survival may depend on the ability to change strategies as the environment changes. All in all, growing and continuing to operate in the market by new firms should be, ceteris paribus, a tougher achievement in more turbulent markets (i.e. those characterized by the rapid emergence of new ideas, linked to a faster emergence of new products and processes; see Geroski, 1995). Different theoretical developments have placed emphasis on different mechanisms that shape the relationship between innovation, growth and survival. Dynamic (neoclassical) competitive models underline the role of firms’ efficiency and the effectiveness of market selection in shaping firms’ growth and survival. For example, in Jovanovic’s (1982) model of passive learning, surviving younger (and smaller) firms, characterized by a time-invariant efficiency parameter, grow more than older (and larger) counterparts: this is the result of a market selection process, i.e. the between-firm effect, which brings the growth of the most efficient firms and – as time passes – the shrinking and the exit of the least efficient ones (see Jovanovic, 1982, p. 656). In Ericson and Pakes’ (1995) active learning framework, firms decide in each period whether to exit or to operate in the market, and in the second case, the level of exploratory investments in order to rationally maximize expected profits; higher levels of investment ensure more favourable distribution of the efficiency levels in the next period (see Pakes and Ericson, 1998, pp. 17, 19). Conversely, the evolutionary tradition places more emphasis on the idiosyncratic characteristics of the firm (and not just on the competitive market selection mechanism), which has to be understood as the implementation of different organizational set-ups, processes of production and attitude towards innovation at the level of the firm. Heterogeneous firms are characterized by different learning processes that make them improve their efficiency, i.e. the within-firm effect. Selection among different variants of technology, equipment and lines of production occurs to a good extent within firms (see Coad, 2007; Bottazzi et al., 2010; Dosi, 2012, pp. 23-26, among others), mainly driven by the implementation of better processes of production (process innovation) or the introduction of new products (product innovation). Following the evolutionary tradition, the short-run market selection mechanism via reallocation of market shares is not so effective in real markets,1 while a long-run selection is still at work, operating through the elimination (exit) of the worst and obsolete performers. Summing up, different traditions in the rich literature on industrial dynamics claim for a complex (and not unique) structure of the ‘mechanics’ linking learning, competition, growth and survival. Each strand of the literature places greater stress on one channel or another. In particular, we can distinguish between: (1) the authors that claim for a major role played by the market selection mechanism (in the short run) among incumbent firms, i.e. the between effect; and (2) those that claim for a selection mechanism operated (in the medium/long run) at the level of the firm through the implementation of better products and processes, i.e. the within effect.