Fast-growing firms, product strategies and skills development

1. Fast-growing firms, product strategies and skills development Geoff Mason*+, Catherine Robinson** and ChiaraRosazzaBondibene*+ *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

2. 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

3. 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)

4. 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?

5. 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)

6. 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

7. 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

8. 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

9. 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 employedin qualifications group i and N = total employment in each establishment.

10. 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

14. 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:

15. 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)

20. 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?

25. 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