Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 205: Untangling the relationships among growth, profitability and survival in new firms

Frédéric Delmar (), Alexander McKelvie () and Karl Wennberg ()
Additional contact information
Frédéric Delmar: Sten K. Johnson Centre for Entrepreneurship School of Economics and Management, Postal: Sten K. Johnson Centre for Entrepreneurship School of Economics and Management, Lund University , P.O. Box 7080, S-220 07 Lund Sweden
Alexander McKelvie: Syracuse University, Postal: Department of Entrepreneurship & Emerging Enterprises Whitman School of Management, Syracuse University , 721 University Ave. , Syracuse, NY 13244 USA
Karl Wennberg: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: The performance of new firms is important for economic development but research has produced limited knowledge about the key relationships among growth, profitability, and survival for new firms. Based on evolutionary theory, we develop a model about how new firms resolve uncertainty about their ability to prosper in a market by monitoring changes in profitability. Our model predicts selection pressures to weed out underperforming firms and learning to allow survivors to improve performance and grow. We test our theory using a unique panel of knowledge-intensive new firms in Sweden. We find strong support for the notion that profitability enhances both survival and growth, and growth helps profitability but has a negative effect on survival. Implications are discussed.

Keywords: Entrepreneurship; New Firms

JEL-codes: L22; L26; M13

47 pages, June 13, 2013

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