The Dynamic Relationship between Growth and Profitability under Long-Term Recession: The Case of Korean Construction Companies

Abstract

Abstract:We conducted an empirical analysis of the dynamic relationship between growth and profitability for small-and medium-sized construction companies that faced long-term economic stagnation in Korea. The period of the analysis spanned 2000 to 2014, and the full period was divided into two halves: before the 2008 global financial crisis and after it. Our empirical model was based on the system generalized method of moments model, and 264 construction companies were used as the study sample. The results of the empirical analysis are as follows. (1) A profitability-driven management strategy limits company growth, thus prolonging the economic downturn; (2) When the macroeconomic environment is relatively stable, high growth in the previous period fosters profitability in the current period. This implies that the phenomenon of dynamic increasing returns is present in the Korean construction industry, and learning through growth enhances productivity and profitability. Consequentially, a strategy oriented towards short-term profitability (popular with small-and medium-sized Korean construction companies) makes the corporate management less resilient, causing them to select "de-growth" during the long-term stagnation by decreasing their scale of operations. Accordingly, it is important for companies to maintain the balance between growth and profitability.

Inter-Relationship Between Firm Growth and Profitability in a Context of Economic Crisis

“…In favorable economic situations its analysis is of great concern, but it is essential in times of economic crisis since, as some recent studies seem to indicate (Federico & Capelleras, 2015;Yoo & Kim, 2015), the relationship between profitability and growth can vary according to the economic environment the company faces, and the effects of growth determinants tend to change.…”

Governing Board Attributes as Profitability Influencers under Endogeneity: An Econometric Analysis in South Africa

“…However, a "share-centred view" tends to focus on short-term profitability (Greenwood, 2004), which is a limitation of the shareholder theory since it usually deters other key sustainable strategies from achieving business success (Clarke, 2014). Consequentially, a strategy focused on short-term profitability is less resilient during periods of long-term stagnation that trigger corporate management to select "de-growth" by reducing its scale of operations (Yoo & Kim, 2015). In this context, the board plays a key role in ensuring that management's strategies are directed towards value maximisation and not value extraction for the self-interests of management.…”

“…Firm profitability is measured by several approaches namely return on sales (ROS), ROE, and ROA (Yoo & Kim, 2015). However, ROA has the benefit of assessing the efficiency and effectiveness of the management of assets to generate profits whereas ROE and ROS cannot capture the inclusive perspective of corporate profitability (Yoo & Kim, 2015). On average, a higher ROA implies maximising shareholder value.…”

Profit Maximization Strategies Employed by the Small and Medium Size Building Contractors in Dar-Es-Salaam, Tanzania

“…Tanzania's SMSBCs, being not immune to these challenges; it has also been experiencing the same, when measured against the usual criteria of cost, productivity, quality, safety and environmental responsibility (Ofori 2002 in Ndulane 2015), despite having all the regulatory bodies such as the Contractors Registration Board(CRB), the Engineers Registration Boards(ERB), and the Architects and Quantity Surveyors Registration Board(AQRB), supporting these contractors, still challenges on profitability and growth prevails, (Ndulane 2015). Profitability, which is one of the importance pre-conditions for long-term firm's survival and success; reflects the final outcome of any business operations, and maybe reduced due to the continuation on decline of market demand, Yoo & Kim (2015); Teshager (2016) and Babalola & Anifowose (2018). Moreover, Teshager (2016), insists that; profitability is the ratio which measure the performance of the company, and it shows a company's ability to generate earnings for a certain period at a rate of sales, assets and certain of capital stock.…”

“…Some respondents highlighted that; contractors, often have trouble ending jobs because they are more focused on starting the next one. Yoo, & Kim (2015) unwraps that; project timely execution can also be attained when construction companies focus on reducing production costs or by practicing efficient business processes, which leads to a higher profitability.…”