Drivers of firm performance: a holistic and multivariate panel data approach

Firm performance is important for a number of reasons related to job creation, firm survival, innovation, competiveness and overall economic performance; motivating a large body of research on its determining factors. It is essential to consider the macroeconomic environment in any firm performance analysis, as this determines the strategies employed by firms, as well as subsequent performance. Despite the imperative of such research, a lacuna exists in the literature. To address this gap, a holistic multivariate model is developed which relates firm performance to firm-level characteristics, firm strategy and key elements of the macroeconomic environment. This thesis, therefore, investigates the determinants of firm- level performance using descriptive analysis and System Generalised Method of Moments (SYS-GMM) regression models to analyse panel datasets from the Irish Census of Industrial Production and Annual Services Inquiry for 2,200 firms covering the manufacturing and services industries in Ireland over the period 1991-2007. This provides insights on the performance of firms during an export-led growth phase (1991-2000) and a credit-led domestic demand-driven growth phase (2001-2007) in the Irish economy. Results show that the performance of firms is strongly influenced by changes in the macroeconomic environment, with manufacturing firms showing higher employment growth during the period of export-led growth and higher turnover and productivity performance during the credit-led domestic demand-driven growth phase. The impact of firm strategy on firm performance is also moderated by macroeconomic conditions, with firms adopting strategies such as trade and training to increase turnover and productivity during the second growth phase. A strong negative firm size-growth effect is found which remained robust to time period, industry and ownership type. There are performance differentials between foreign and domestic firms, with domestic firms performing better than foreign firms in terms of employment and turnover, while foreign firms showed higher productivity performance. These results imply that small Irish-owned firms are important sources of job creation and output growth. Overall, in many of the firm performance model specifications in this study, the effect of the determinants on firm performance is dependent on the definition of firm performance and firm size employed. These results suggest the need to adopt a holistic multivariate approach to the study of firm performance which incorporates both internal (firm-specific characteristics and strategy) and external factors (the macroeconomic environment). The multidimensional nature of firm performance should also be taken into account through the use of multiple firm performance measures for any meaningful analysis. Finally, the findings suggest a potential role for policy aimed at ensuring macroeconomic stability, supporting small indigenous firms and improving their productivity so as to ensure that they are more competitive in global markets. This study not only makes an important contribution to the firm performance literature, the results also have possible policy implications in the area of small business development.