Dynamics of Growth and Profitability: The Case of Japanese Manufacturing Firms

Akihiko Nakano and Donghun Kim

Global Economic Review, 2011, vol. 40, issue 1, 67-81

Abstract: This study investigates interaction between firm growth and profitability using panel data on 1633 Japanese manufacturing firms for 1987-2007. Our estimation results generally confirm that firms face a trade-off between growth and profitability and show that, in Japanese manufacturing firms, the link between prior growth and current profits is much stronger than the link between prior profits and current growth. Therefore, the study confirms that current profits are a pre-requisite for future growth while excessive current growth is detrimental to future profits. It is found, however, that in some sectors, such as the automobile industry and the chemical industry, high growth and high profit rates can be achieved at the same time without damaging profitability.

Keywords: Firm growth; profitability; law of proportionate effects; persistence of profits (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/1226508X.2011.559329

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