Determinants of firms' success and failure

Summary:

Through the decades, a great number of theories (Structure Conduct Performance - SCP, Persistence of Profit - POP, Resource-Based Theory - RBT, etc.) tried to explain the reasons why some firms are more profitable/successful than the others. Numerous researchers used various approaches and diverse methodologies while investigating different factors that may impact firm performance. Although the research results on the factors that affect a firm’s profitability are not uniform, the scientific researchers and practitioners agree on one: in the present context of market liberalization, increased competition, technological innovation, vanishing trade barriers (this especially becomes pronounced for Croatia after its accession to the EU), the investigation of the determinants that are relevant and significant in explaining firms’ business success becomes crucial.

Having previous in mind, the first goal of this research is to create a model that will identify the factors that determine firms’ success. Since manufacturing industry is recognised as a key driver of prosperity and development of any economy, it is of great interest to analyse the performance of firms operating within it. Achieving high performance (especially in terms of profitability) can be seen as a primary goal of any firm. If they accomplish business success, firms have the ability to reward its owners in terms of high return and also to create additional value for the consumers by reinvesting profit in superior equipment, production process, etc. On the other hand, firms that are experiencing poor performance (e.g. firms that operate at losses) cannot survive in the long run. It is therefore of great importance (for the firms as well as for the policy makers) to identify factors that may cause a firm’s failure. In terms of this project, this would mean that aside from the identification of factors influencing firms’ success, a special attention would be given to the determination of factors that explain firms’ financial failure. In this way, it would be possible to create a model that will distinguish successful from unsuccessful firms and that will be able to predict the probability of a firm’s financial failure, which represents the second research goal.

While for the first part of the research, a multiple regression and the dynamic panel analysis will be used, for the second part of the research, the logistic regression (LR) as well as a novel and sophisticated econometric method i.e. neural networks (NN) will be applied.

Ovaj rad je financirala Hrvatska zaklada za znanost projektom UIP-2014-09-1745