Showing papers by "Alex Coad published in 2021"

Editorial: the dark side of innovation

Abstract: We provide a broad discussion of the dark side of innovation, before introducing the papers of the special issue. We start with a critical reply to optimists, complementing the list of indicators s...

Understanding firm exit: a systematic literature review

Abstract: We investigate the corpus of literature on firm exit by means of a systematic literature review (SLR) which yields a final sample of 142 journal articles for the period 1991–2020. The phenomenon of firm exit is explored from a variety of perspectives: business exit; exit at the individual entrepreneur level; exit from specific markets; exit from foreign markets; and the role of exit for industrial dynamics conceived more broadly. Special attention is given to the various exit routes, including voluntary liquidation, mergers and acquisitions (M&A), initial public offerings (IPO), and of course bankruptcy. The SLR sets the scene for the Special Issue papers that are presented towards the end, and we conclude with some suggestions for future research. The Plain English Summary This article develops a systematic literature review around three decades of firm exit research, patterns, developments, and intriguing gaps. In this paper, we systematically review 142 studies on firm exit from various perspectives, identify major patterns, and outline the debate around firm exit. We propose reflections useful for scholars willing to engage in firm exit research in the future and set the scene for the special issue papers. Overall, this work shows the remarkable progress made in the area of firm exit that has evolved from the view of exit as a homogenous event signaling failure to a vision of exit as a heterogenous event. Exploring the sources of heterogeneity of exits from various perspectives could offer promising paths for future research.

A bit of basic, a bit of applied? R&D strategies and firm performance

Abstract: Most studies analysing the relationship between R&D and firm growth focus on total R&D investment. This paper aims to analyse separately each component of R&D investment (basic research, applied research and technological development) and evaluate how these types of R&D investment are related to firm growth. Using a sample of 3972 Spanish manufacturing firms during 2004–2015, our empirical results are the following. First, firms have heterogeneous R&D strategies. The common wisdom that young firms invest in basic research, while old firms invest in applied research, is not supported in our data. Second, we investigate the characteristics and dynamics of firms with different R&D strategies. We observe complementarities between applied research and technological development due to their positive associations with firm growth. Finally, our results show that there is a tendency for firms to transition from basic research to applied research.

The birth of new HGEs: internationalization through new digital technologies

Abstract: This paper explores the relationship between new digital technologies, internationalisation activity and its impact on High Growth Enterprises (HGEs), using the EIB Group Survey of Investment and Investment Finance and ORBIS data for 27 EU Member States and the United Kingdom. After controlling for sample selection bias, our results suggest that being a HGE is positively associated with the probability that a firm conducts international activities, particularly FDI. Conversely, the internationalisation process seems to trigger strong subsequent firm-growth only for FDI, not for exports. Furthermore, we show evidence on the positive association between firms that are internationalised and those adopting new digital technologies. The adoption of new digital technologies is indirectly related to the status of being a HGE via internationalisation activity in the current period. Our results highlight the complex influence of exporting and FDI on the capacity to become a HGE and the role of new digital technologies in this process.

Growth paths and routes to exit: 'shadow of death' effects for new firms in Japan

Abstract: Research has recently emphasized that the non-survival of entrepreneurial firms can be disaggregated into distinct exit routes such as merger and acquisition (M&A), voluntary closure, and failure. Firm performance is an alleged determinant of exit route. However, there is a lack of evidence linking exit routes to their previous growth performance. We contribute to this gap by analyzing a cohort of incorporated firms in Japan and find some puzzles for the standard view. Our empirical analysis suggests that sales growth generally reduces the probability of exit by merger, voluntary liquidation, and also bankruptcy. However, the relationship is U-shaped—such that rapid growth actually increases the probability of exit. More generally, each of the three exit routes can occur all across the growth rate distribution. Large firms are more likely to exit via merger or bankruptcy, while small firms are more likely to exit via voluntary liquidation.

Taking the entrepreneur out of entrepreneurship

Abstract: This ‘Debate Essay’ responds to the extensive overview of research on new venture survival provided by Soto-Simeone et al. (2020). The material they reviewed exclusively emphasised the link between the talents, skills, awareness of the business owner and new venture outcomes. Our case is that such a review is incomplete, even misleading, because it omits the key concept of “chance,” and all references to the stream of literature demonstrating that new venture performance is best explained by the gambling analogy. We therefore set out the Gambler’s Ruin Model in which new venture performance is a random walk and exit depends on access to financial resources – chips. This model takes the entrepreneur out of entrepreneurship.

The Dark Side of Innovation

Abstract: We provide a broad discussion of the dark side of innovation, before introducing the papers of the special issue. We start with a critical reply to optimists, complementing the list of indicators showing steady human progress with a list of indicators that show sustained deterioration (largely due to innovation). We then outline some relevant dimensions of harmful innovation, before distinguishing between the types of harm brought on by innovation. We conclude with an overview of the SI papers.

Asbestos, leaded petrol, and other aberrations: Comparing countries' regulatory responses to disapproved products and technologies

Abstract: Industrial innovation churns out increasingly unnatural products and technologies amid scientific uncertainty about their harmful effects. We argue that a quick regulatory response to the discovery...

Capacity constraints as a trigger for high growth

Abstract: High-growth enterprises (HGEs) have a large economic impact but are notoriously hard to predict. Previous research has linked high-growth episodes to the configuration of lumpy indivisible resources inside firms, such that high capacity utilisation levels might stimulate future growth. We theorize that firms reaching critically high capacity utilisation levels reach a “trigger point” involving either broad-based investment in further growth or shrinking back to previous levels. We analyze EIBIS survey data (matched to ORBIS) which features a question on time-varying capacity utilisation. Overcapacity is a transitory state. Firms enter into overcapacity after a period of the rapid growth of sales and profits, and the years surrounding overcapacity have higher employment growth rates. Firms operating at overcapacity make incremental investments (e.g. capacity expansion, process improvements and modern machinery) rather than investing in R&D and new product development. We find support for the “fork in the road” hypothesis: for some firms, overcapacity is associated with launching into massive investments and subsequent sales growth, while for other firms, overcapacity is negatively related to both investments and sales growth. Operating above maximum capacity is like a “fork in the road”: while some firms shrink back to stay within existing capacity constraints, others respond by launching into broad-based growth. We develop a theory of firm growth, according to which some firms are better positioned for subsequent growth, depending upon their state of capacity utilisation. Firms with plenty of slack capacity can easily grow within the bounds of existing capacity constraints. Firms that are already operating above maximum capacity cannot grow by drawing on slack resources, but instead, their growth requires a broad-based investment in many interconnected areas. Our statistical analysis shows that operating above maximum capacity is relatively rare and unlikely to persist and seems due to rising demand. Some firms respond to being above maximum capacity by slowing down and adapting to existing capacity constraints, while others treat overcapacity as a “trigger point” that launches them into subsequent growth. Our results are of interest to those seeking to understand and predict firm growth: investors, entrepreneurs, academics and policymakers.

Amundsen versus Scott: are growth paths related to firm performance?

Abstract: In the race to the South Pole, Roald Amundsen’s expedition covered an equal distance each day, irrespective of weather conditions, while Scott’s pace was erratic. Amundsen won the race and returned without loss of life, while Scott and his men died. In the context of firm growth, the Amundsen hypothesis suggests that smoother growth paths are associated with better performance in subsequent periods. We develop a new method to investigate how firms’ sales growth deviates from their long-run average growth path. Our baseline results suggest that growth path volatility is associated with higher growth of sales and profits, but also with higher exit rates. However, this result is driven by firms with negative growth rates. For positive-growth firms, volatility is negatively associated with both sales growth and survival, providing nuanced support for the Amundsen hypothesis. In the race to the South Pole, Roald Amundsen and Robert Falcon Scott adopted different strategies that resulted in victory for Amundsen and death for Scott. Amundsen’s approach was to consistently pace his team (to cover a fixed and equal distance each day), while Scott sought to cover as much distance as possible each day. In the context of firm growth, this relates to the tradeoff between steady growth (low volatility in growth rates) and growing as fast as possible in each period (potentially leading to high volatility in growth rates). We develop a new set of indicators for quantifying firms’ growth paths, observing that growth path volatility in general is associated with higher growth of sales and profits, but also with higher death rates. This result is driven by firms with negative sales growth, however. Like Amundsen, it seems beneficial for firms with positive sales growth to pace themselves to increase their subsequent growth and likelihood of survival.

EIB Working Paper 2021/02 - The birth of new high growth enterprises : internationalisation through new digital technologies

Abstract: This paper explores the relationship between new digital technologies, internationalisation activity and its impact on High Growth Enterprises (HGEs), using the EIB Group Survey of Investment and Investment Finance and ORBIS data for 27 EU Member States and the United Kingdom. After controlling for sample selection bias, our results suggest that being a HGE is positively associated with the probability that a firm conducts international activities, particularly FDI. Conversely, the internationalisation process seems to trigger strong subsequent firm-growth for FDI. Furthermore, we show evidence on the positive association between firms that are internationalised and those adopting new digital technologies. The adoption of new digital technologies is indirectly related to the status of being a HGE via internationalisation activity in the current period. Our results highlight the complex influence of exporting and FDI on the capacity to become a HGE and the role of new digital technologies in this process. JEL CODES: F14, L21, 031

Econometrics and the Growth of Firms: Perspectives from Evolutionary Economics

Abstract: This article discusses recent results and future research possibilities in the areas of econometrics and firm growth, drawing on Dosi and Marengo’s “10 building blocks” of evolutionary theory. Thes...

John Haltiwanger: recipient of the 2020 Global Award for Entrepreneurship Research

Abstract: The 2020 Global Award for Entrepreneurship Research has been awarded to Professor John Haltiwanger. John Haltiwanger has made significant contributions to the field of entrepreneurship by improving our understanding of job creation and destruction, productivity growth, and the role of small- and medium-sized firms (SMEs) in economic development. He has played a major role in the careful development of large, longitudinal firm-level datasets, and introduced a novel and widely adopted measure of firm growth that addresses previous statistical biases. His work has influenced public policy and national statistical offices around the world. The winner of the 2020 Global Award for Entrepreneurship Research, John Haltiwanger, has pioneered research showing that it is mainly firm age, not size, that matters for job creation. Through analyzing the relationship between employment, growth, and firms, he has advanced our understanding of how the economy works. He has done this by building new datasets and introducing a new measure of firm growth, solving problems encountered with earlier techniques. His work has also broadened the policy debate on entrepreneurship and inspired people all around the world. From a policy perspective, John Haltiwanger has shown that it is difficult to justify targeted industrial and commercial policies, and if job creation is to be supported, politicians need to target young firms rather than small firms. These important findings from John Haltiwanger’s pioneering work have been published in world-class leading academic and scientific journals.