Dynamics of investment and firm performance: comparative evidence from manufacturing industries

Abstract

If the relation between investment and economic growth is well established in the macroeconomic literature, the existence of a similar link at the level of the firm has been challenged by empirical work. This paper investigates the channels linking investment and firm performance in the French and Italian manufacturing industries. It does so by putting forth a novel methodology to identify investment spikes that corrects for size dependence. While maintaining the desired properties of a spike measure, our chosen proxy retrieves the expected relation between investment and firm performance. Ex-ante, more efficient and fast growing firms display a higher probability to invest; in turn, after an investment spike has taken place the group of investing firms shows further gains in performance. Finally, expansionary investment episodes, as proxied by the opening of new plants, have a negative effect on profitability while they are associated with higher sales and employment levels.JEL codes: C14, D22, D24, D92, E22, L11, L23, L60

Capital Investments and Manufacturing Firms’ Performance: Panel-Data Analysis

“…Moreover, our results support and complement the findings from Aljinović Barać and Muminović [20], who found, on the case of dairy processing industry in Slovenia, Croatia, and Serbia, a negative effect of capital investments on the short-term profitability, also expressed by return on assets, for which, according to the authors, a possible explanation can be found in the time lag between the moment of investment and the moment in the future when investment will generate the profit. Although other researchers have used different measures of profitability in their studies, we can say that in general, the results of this study also support the findings from, for example, Grazzi et al [3], Aw et al [22], Fama and French [25], Yu et al [26], Lööf and Heshmati [27], Johansson and Lööf [28], Amoroso et al [31], Curtis et al [32], who found a positive relationship between capital investments and profitability.…”

“…On the other hand, Grazzi et al [3], on the case of French and Italian manufacturing firm-level data, using econometric approach that allows disentangling of the repair and maintenance episodes from large tangible investments, and after controlling for firm characteristics, found that tangible investments are associated with higher productivity, profitability, and employment. Ching-Hai et al [21], while examining relationship between capital expenditures and corporate earnings of manufacturing firms listed on the Taiwan Stock Exchange, and after controlling for current corporate earnings, found a significantly positive association between capital expenditures and future corporate earnings.…”

“…Capital investments, i.e., investments in fixed assets, represent an important factor that can serve as a signal in predicting the future profitability of the firm and stock returns [2]. Assessing the impact of investment at the level of the firm has not always been a viable research topic because, for many years, it was hindered by the lack of observed investment data and it is only recently that scholars have started to document the nature of firms' investment behavior [3]. Since most of the research regarding investment impact analysis focuses on the macroeconomic level, such as the impact of FDI on GDP growth, this paper attempts to fill the gap at the microeconomic level, i.e., the level of the firm.…”

Determinants of firm profitability in the Croatian manufacturing industry: evidence from dynamic panel analysis

“…Due to the nature of their businesses, firms belonging to the capital-intensive industries are required to take high level of investment in fixed assets for starting up the business as well as for their overall functioning. With investments that involve technologically more advanced machinery and equipment, firms could achieve higher productivity (Grazzi, Jacoby, & Treibich, 2016) and greater output, resulting in higher level of profitability. The requirements for substantial investment in fixed assets indicate the existence of economies of scale, which limits the number of the companies that could profitably operate within an industry, thus creating an entry barrier.…”

What do U.S. biopharmaceutical companies get from patents and research and development spikes for their dynamic corporate performance?

“… β 1 accounts for contemporaneous effect of R&D spikes on corporate performance, whereas the other coefficients of R&D spikes explain the time‐lagged effect of R&D spikes in the previous four years, respectively. We follow prior studies (e.g., Geylani & Stefanou, ; Grazzi, Jacoby, & Treibich, ; Kapelko, Lansink, & Stefanou, ) in defining an R&D spike ( Spike ) in a year in which the firm's R&D investment rate (total R&D expenses to capital stock) is larger than 2.5 times of firm's median R&D investment rate in a specific time period: where RD i , t refers to the R&D expenditure of company i in year t ; K i , t − 1 is the capital stock of company i in year t − 1; and τ is the time period from 2011 to 2015.…”