Inside the virtuous circle between productivity, profitability, investment and corporate growth: An anatomy of Chinese industrialization

• Published in: Research policy 2017-06, Vol.46 (5), p.1020-1038
• Main Authors: Yu, Xiaodan, Dosi, Giovanni, Grazzi, Marco, Lei, Jiasu
• Format: Article
• Language: English
• Subjects: Catching-up; Chinese industry; Learning; Productivity; Profitability; Virtuous circle
• ISSN: 0048-7333; 1873-7625
• DOI: 10.1016/j.respol.2017.03.006

•We explore the dynamics of the ‘virtuous circle’ driving the impressive Chinese catching-up and growth.•We investigate the micro relationships linking productivity, profitability, investment and growth based on China's manufacturing firm-level dataset.•We find that productivity variations, rather than relative levels, are the prevalent productivity-related determinant of firm growth.•The direct relation between profitability and firm growth is much weaker.•The only visible profitability and growth relationship is mediated via investment. This work explores the dynamics of the ‘virtuous circle’ driving the impressive Chinese catching-up and growth by investigating the micro relationships linking productivity, profitability, investment and growth, based on China's manufacturing firm-level dataset over the period 1998–2007. Interestingly and somewhat puzzlingly, we find that productivity variations, rather than relative levels, are the prevalent productivity-related determinant of firm growth. Moreover, the direct relation between profitability and firm growth is much weaker and its contribution to the explanation of the different rates of firm growth is almost negligible. The only visible profitability-growth relationship is mediated via investment. Firm's contemporaneous and lagged profitabilities display positive and significant effect on the probability to report an investment spike, and, in turn, investment activities are related to higher firm growth.