The Profitability-Growth Nexus in the Mexican Manufacturing Industry

Abstract

The profitability-growth relationship is examined at the sectoral level of the Mexican manufacturing industry. For the theories that explain this connection, business growth drives profitability (classical), profitability explains business growth (evolutionary), or a negative link is a rule (managerialism view). The methodology is a vector error correction model (VECM) besides quadratic and piecewise regression equations. The findings highlight that higher profitable industries also exhibit higher growth. Conversely, business growth does not improve profitability, confirming the predictions of evolutionary theories. Also, the results of this study consider firm size crucial for developing countries, due to the different role that firm size plays in determining productivity growth. Although the research is not specifically focused on the firm level, the study still sheds light on the efficiency and profitability conditions that prevail in the Mexican entrepreneur. For example, the conclusions suggest a stronger profitability-growth link in sectors formed by smaller firms. Suggesting the right conditions for investment, competition, economic growth, and quality improvement.

Keywords: Profitability, Business Growth, Manufacturing, Panel Data