Untangling the Relationships Among Growth, Profitability and Survival in New Firms

The performance of new firms is important for economic development but research has produced limited knowledge about the key relationships among growth, profitability, and survival for new firms. Based on evolutionary theory, we develop a model about how new firms resolve uncertainty about their ability to prosper in a market by monitoring changes in profitability. Our model predicts selection pressures to weed out underperforming firms and learning in order to allow survivors to improve performance and grow. We test our theory using a unique panel of knowledge-intensive new firms in Sweden. We find strong support for the notion that profitability enhances both survival and growth, and growth helps profitability but has a negative effect on survival. Implications are discussed.