Fast-growing firms, product strategies and skills development

Fast-growing firms, product strategies and skills development

Geoff Mason*+, Catherine Robinson** and Chiara Rosazza Bondibene*+

*National Institute of Economic and Social Research, London

**University of Kent+ Centre for Learning and Life Chances in Knowledge Economies and

Societies (LLAKES)

Paper prepared for Productivity and Firm Growth Workshop, NIESR, 2 July 2014

Order of presentation

• Firm growth, skills and training: background issues

• Theory and hypotheses• Data sources and measurement issues• Empirical specification• Impact of training on firm growth• Lack of persistence in rapid firm growth• Summary and assessment

Rapidly-growing firms: what do we know about them?

• Fast-growing firms tend to be younger than other firms (Henrekson and Johansson, 2010)

• No clear relationship between firm growth and size• Mixed evidence on links between firm growth and

innovation (Hőlzl and Friesenbichler, 2010; Coad and Rao, 2008; Mason et al, 2009)

• Many fast-growing firms do not maintain their rapid growth into subsequent time periods (Parker et al, 2010; Daunfeldt and Halvarsson, 2012)

• Coad et al, 2014: Little knowledge to date about the ‘internal features’ of fast-growing firms (eg, business strategy, investment, work organisation, skills and training)

Research questions• Lack of persistence in rapid firm growth probably reflects

pressures and challenges of such growth (eg, different skills required as operations are scaled up)

• Fast-growing firms may find it difficult to maintain and improve the quality of key assets which helped drive their initial rapid growth

• Focus here on role of skills and training:– How much does rapid firm growth depend on prior training of employees?

– Do firms’ commitments to employee training survive the challenges of coping with rapid growth?

Explaining heterogeneity in firm performance

• Resource- and knowledge-based theories of the firm suggest that superior performance requires firms to develop products that are superior and/or cheaper than those of rivals and hard for others to duplicate or imitate (Teece et al, 1997; Phelan and Lewin, 2000; Teece, 2007)

• Emphasis on development of ‘dynamic capabilities’: eg, skills and knowledge required for new product development, improvement of production processes and organisational routines and ability to identify and make effective use of relevant new knowledge (Teece et al, 1997; Eisenhardt and Martin, 2001)

• Strong correlation at firm level between skills and indices of product strategy which capture innovation leadership, involvement in ‘premium quality’ production and ability to command above-average prices (Mason, 2011)

Firm growth and skills development: hypotheses

• At high levels of capacity utilisation, opportunity costs of providing training for existing employees during working hours are high pressures to rely more on external recruitment of skilled workers than on staff training

• But firm-specific nature of the superior products and/or production techniques required for firms to achieve rapid growth may make it essential to commit resources to staff training and development

• H1: All else being equal, firm growth is positively related to prior investments in workforce training

• Concerns about the opportunity costs involved in training may intensify for firms which find themselves experiencing rapid growth -- could help explain why rapid firm growth tends not to persist into future time periods

• H2: All else being equal, the level of training provided by fast-growing firms tends to decline in later stages of rapid-growth periods

Data sources• National Employers Skill Survey (NESS) 2007 and 2009:

nationally representative telephone surveys of establishments in England with at least two people working in them -- 79,012 establishments surveyed in 2007; 79,152 establishments in 2009

• Both NESS 2007 and NESS 2009 contain extensive data on training provision – but data on innovation leadership and other components of product strategy measure are only found in NESS 2009 as are data on workforce qualifications (which can be used to construct a proxy measure of skill levels)

• Business Structure Database (BSD): contains employment and sales data for firms since 1998 as well as information on the years of firm births and deaths

Matched NESS-BSD samples• Private sector establishments in NESS 2007 and NESS

2009 matched to firms in the BSD which had ten or more employees in 2007 and continued to be classified as ‘active’ by the ONS in 2010

• In total some 19.3% (15250) of NESS 2007 establishments and 22.3% (17489) of NESS 2009 establishments were matched to BSD firms

• Compared with full NESS samples, the two matched NESS-BSD samples have lower shares of establishments in the under 10 employees size group and in business services and community, social and personal services

• Conversely, the two matched samples have slightly larger shares of establishments in retail/wholesale and hotels

Product strategy and skill measures

• Summary measure of product strategy derived from factor analysis of NESS 2009 respondents’ answers to questions which invited them to rate themselves against other establishments in the same industries in respect of: – product quality– innovation leadership – dependence on non-price factors for competitive success

• Certified skill levels defined on the basis of a wage-weighted qualifications index in which ‘effective units of labour’ are calculated relative to the unskilled category as follows:

skills =

where three different qualification groups are identified; wi = mean hourly earnings of qualifications group i (indexed to unity in the case of the ‘low qualifications’ group); qi= numbers employed in qualifications group i and N = total employment in each establishment.

Nqwi

ii /][3

1

Training measures• Summary measure of overall training provision derived through a

factor analysis of four indicators:– Whether establishments arrange or fund either on- or off-the-job

training (Yes/No)– Whether establishments arrange or fund both on- and off-the-job

training (Yes/No)– Proportion of staff receiving training of some kind– Training intensity: average number of days training per employee

arranged or funded by establishment • Since NESS respondents were asked to estimate the proportion of

training that was devoted solely to health, safety and induction training, a second summary measure of training which excludes those three types of routine training can also be estimated

Figure 3.1: Mean product strategy score, 2009, analysed by quantiles of firm growth rate distributions, 2007-2010

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

1-24 25-49 50-74 75-94 95-100

Firm growth rate distributions (percentiles)

Mea

n pr

oduc

t st

rate

gy s

core

Employment growthSales growth

Source: NESS 2009, BSD 2007-10

Figure 3.2: Mean skills score, 2009, analysed by quantiles of firm growth distributions, 2007-2010

1.12

1.14

1.16

1.18

1.20

1.22

1.24

1-24 25-49 50-74 75-94 95-100


Mea

n sk

ills

scor

e

Employment growth

Sales growth


Figure 3.3: Mean training summary score, 2007, analysed by quantiles of firm growth distributions, 2007-2010

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

1-24 25-49 50-74 75-94 95-100


Mea

n tr

aini

ng s

umm

ary

scor

e

Employment growth

Sales growth


Empirical specification: combining time series and cross-sectional data

• First, following Coad (2010) we explore the relationship between employment (sales) growth and lagged sales (employment) growth between 2008-2010 by estimating reduced-form vector auto-regression (VAR) models:

• Second, following Black and Lynch (2001), the residuals

from the first-stage equation are regressed against measures of training and other firm-level characteristics which are only available for a single year:

12,22,1

1,21,10

titi

titiit

hSalesGrowtEmpGrowth

hSalesGrowtEmpGrowthEmpGrowth

21,21,10)(Re tki

ktiit XTrainingEmpGrowthsiduals

Other methodological issues• Assume NESS establishments are representative of BSD firms to which

they belong• Establishments which are part of multi-site firms with two or more

establishments in the sample are weighted by their shares of total firm employment in the sample

• Establishments which are part of multi-site firms but are the only establishment from their organisation in the sample are given a weight of one as are single-site firms

• Address simultaneity issues by regressing 2008-10 firm growth on 2007 training levels

• Address endogeneity concerns by use of instrumental variables in second-stage equation

• Training summary measures instrumented by measure of barriers to training and by rank order versions of themselves

• Check sensitivity of overall training measure to use of alternative measures which (1) omit routine health, safety and induction training (2) capture training intensity alone (average number of days training per employee)

Table 5.4: Vector autoregression estimates of firm growth, 2008-2010

Dependent variable: Employment growth rate

Sales growth rate

Employment growth (t-1) -0.0287*** 0.1778***

[0.005] [0.007]

Sales growth (t-1) 0.0675*** -0.1735***

[0.004] [0.005]

Employment growth (t-2) -0.0224*** 0.1022***

[0.004] [0.006]

Sales growth (t-2) 0.0447*** -0.0879***

[0.003] [0.004]

Observations 44297 44297

Adj R2 0.0106 0.0405

SEE 0.3154 0.4334 Sources: BSD 2008-2010 Notes: *** p<0.01, ** p<0.05, * p<0.1 Firm-weighted vector autoregression estimates. The dependent variables are annual rates of growth. Robust standard errors in brackets are corrected for clustering on firm. All models include controls for single-site enterprises, employment size, firm age, sector and region.

Table 5.5: OLS regressions of 2008-10 employment growth residuals from VAR equations on 2007 training variables and firm-level controls

Dependent variable:

Employment growth

(residuals)

Employment growth

(residuals)

Employment growth

(residuals)

Employment growth

(residuals)

Training (summary measure) 0.0074***

[0.002] Training, excluding HSI training (summary measure) 0.0065***

[0.002]

Training intensity - 2nd quartile 0.0104**

[0.005]

Training intensity - 3rd quartile 0.0111**

[0.005]

Training intensity - upper quartile 0.0151***

[0.005]

Training intensity (excl. HSI) - 2nd quartile 0.0117**

[0.005]

Training intensity (excl. HSI) - 3rd quartile 0.0115**

[0.005] Training intensity (excl. HSI) - upper quartile 0.0128**

[0.006]

Observations 40492 39500 40492 39500

Adj R2 0.0071 0.0071 0.0068 0.0069

SEE 0.3094 0.3107 0.3095 0.3107 Sources: NESS 2007, BSD 2008-10

Table 5.6: OLS regressions of 2008-10 sales growth residuals from VAR equations on 2007 training variables and firm-level controls

Dependent variable:

Sales growth

(residuals)

Sales growth

(residuals)

Sales growth

(residuals)

Sales growth

(residuals)

Training (summary measure) 0.0061**

[0.002] Training, excluding HSI training (summary measure) 0.004

[0.003]

Training intensity - 2nd quartile 0.0078

[0.007]

Training intensity - 3rd quartile 0.0055

[0.007]

Training intensity - upper quartile 0.0158**

[0.007]

Training intensity (excl. HSI) - 2nd quartile 0.0093

[0.007]

Training intensity (excl. HSI) - 3rd quartile 0.0086

[0.007] Training intensity (excl. HSI) - upper quartile 0.0176**

[0.007]

Observations 40491 39499 40491 39499

Adj R2 0.0112 0.0113 0.0111 0.0113

SEE 0.4307 0.4328 0.4307 0.4328 Sources: NESS 2007, BSD 2008-10

Table 5.7: Instrumental variables (IV) regressions of 2008-10 employment and sales growth residuals from VAR equations on 2007 training variables and firm-level controls

Dependent variable:

Employment growth

(residuals)

Sales growth

(residuals)

Employment growth

(residuals)

Sales growth

(residuals)

Training (summary measure) 0.0085*** 0.0061**

[0.002] [0.003] Training, excluding HSI training (summary measure) 0.0075*** 0.0057**

[0.002] [0.003]

Observations 38748 38747 37804 37803

Hansen J test 0.8485 1.1043 1.0381 1.0203

Hansen P value 0.3570 0.2933 0.3083 0.3124

C statistic 0.0689 1.9002 0.0534 0.0834

C statistic P value 0.7929 0.1681 0.8172 0.7727

Kleibergen-Paap LM statistic 3977.10 3976.83 4132.50 4132.38

Kleibergen-Paap P value <0.000 <0.000 <0.000 <0.000 Sources: NESS 2007, BSD 2008-10

Interim assessment• Opportunity costs of providing training versus skill

requirements associated with development of superior products and production/delivery processes

• In case of employment growth, strong support for H1: firm growth positively related to prior investments in training

• Robust to use of different measures of training and tests for potential endogeneity of training measures

• More limited support for H1 in case of sales growth• May reflect greater opportunity costs of training when sales

are growing rapidly• Does this help explain lack of persistence in firm growth in

later time periods?

Figure 5.1: Mean training summary score, 2009, analysed by quantiles of firm growth distributions, 2007-2010

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

1-24 25-49 50-74 75-94 95-100


Mea

n tr

aini

ng s

umm

ary

scor

e, 2

009

Employment growthSales growth


Figure 5.2: Incidence of skill updating needs, 2009, analysed by quantiles of firm growth distributions, 2007-2010

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

1-24 25-49 50-74 75-94 95-100


Pro

port

ion

of f

irms

repo

rtin

g sk

ill u

odat

ing

need

s

Employment growth

Sales growth

Source: Matched NESS 2009-BSD dataset Notes: Firm-weighted estimates. Survey respondents were deemed to have skill updating needs if they expected that, over the next 12 months, any of their employees would need to acquire new skills or knowledge as a result of factors such as new products, new work practices and/or competitive market pressures.

Table 5.8A: Determinants of training provision, 2009

Dependent variable:

Training (summary measure)

Training, excluding HSI training (summary measure)

Employment growth – 25th to 49th percentiles -0.0806*** -0.0531**

[0.022] [0.022] Employment growth – 50th to 74th percentiles 0.028 0.0169

[0.025] [0.025] Employment growth – 75th to 94th percentiles 0.0732*** 0.0680***

[0.025] [0.025] Employment growth – 95th to 100th percentiles 0.0601 0.0558

[0.037] [0.038]


Adj R2 0.0838 0.0735

SEE 0.9513 0.96 Sources: NESS 2009, BSD 2007-10 Notes: *** p<0.01, ** p<0.05, * p<0.1 Firm-weighted OLS estimates. Robust standard errors in brackets are corrected for clustering on firm. All models include controls for single-site enterprises, employment size, firm age, sector and region. The reference categories for the employment and size growth variables are the lower quartiles of the growth distributions in each case. HSI training refers to health, safety and induction training.

Table 5.8B: Determinants of training provision, 2009

Dependent variable:

Training (summary measure)

Training, excluding HSI training (summary measure)

Sales growth – 25th to 49th percentiles 0.0972*** 0.0984***

[0.023] [0.024] Sales growth – 50th to 74th percentiles 0.1075*** 0.1013***

[0.023] [0.024] Sales growth – 75th to 94th percentiles 0.1527*** 0.1393***

[0.024] [0.025] Sales growth – 95th to 100th percentiles 0.1112*** 0.0918**

[0.037] [0.038]


Adj R2 0.0835 0.0743

SEE 0.9509 0.9592 Sources: NESS 2009, BSD 2007-10

Main findings• Rapidly-growing firms benefit from prior investments in training and

also maintain high levels of training at late stage of growth period • Opportunity costs of training apparently outweighed by pressing

need for fast-growing firms to develop new skills and competences to try and deal with challenges of rapid growth

• Need to look elsewhere to help explain lack of persistence in firm growth in later time periods

• Other possible causes include: – limited access to finance to support continued rapid growth – difficulty in predicting future skill requirements in rapidly growing firms

– inherent riskiness of all forms of firm investment, including investments in workforce training

ACKNOWLEDGEMENT

We are grateful to NESTA for financial support of this project

DISCLAIMER

This work was based on data from the Business Structure Database, produced by the

Office for National Statistics (ONS) and the National Employers Skill Survey which

were supplied by the Secure Data Service at the UK Data Archive. The data are

Crown Copyright and reproduced with the permission of the controller of HMSO and

Queen's Printer for Scotland. The use of the data in this work does not imply the

endorsement of ONS or the Secure Data Service at the UK Data Archive in relation to

the interpretation or analysis of the data. This work uses research datasets which may

not exactly reproduce National Statistics aggregates.

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Fast-growing firms, product strategies and skills development