Darwin, recessions and firms : an evolutionary perspective on firms in recessions

Evolutionary theory is well suited for studying how firms are affected by recessions, but little focus has been given, both theoretically and empirically, to this phenomenon. In this paper I draw on evolutionary theory and complex system theories to develop a general model of how recessions affect firm selection. The model shows that recessions can affect selection processes in two distinct ways, one by tightening the selection environment and one by imposing changes in the shape of the fitness landscape. I then use these insights to argue that the narrow “cleansing effect”-interpretation of selection commonly used in the business cycle literature is in danger of ignoring important aspects related to selection in recessions

The effect of recessions on firms’ boundaries

The economic theory of the firm offers conflicting predictions of how the two major effects of recessions, changes in demand and access to credit, affect firm boundaries. Using data on Norwegian firms in the recent recession, we find support for both increased and reduced vertical integration of core activities in response to such changes. Further, we find that access to credit negatively moderates the effect of reductions in demand on vertical integration. The latter finding may highlight a possible explanation for the conflicting theoretical predictions

Innovation, human capital and exogenous shocks

Strategic entrepreneurship is about the simultaneous exploitation of existing advantages and the creation and exploitation of new opportunities. These are often referred to as the strategy-and the entrepreneurship dimension, respectively. We examine how the relative emphasis on the two dimensions of strategic entrepreneurship affects how firms behave with respect to human capital in the context of one particular exogenous shock, namely recessions. We hypothesize and find that the higher the focus on the entrepreneurial dimension, the more firms invest in training, the more likely they are to hire, and the more likely they are to lay off employees. Finally, we also find that these firms are more likely to combine the accumulation of human capital through training with both hiring and firing. In sum, these findings show how challenges and opportunities created by environmental change differ depending on the relative emphasis on the two dimensions. They also show how firms focusing on the entrepreneurial dimension more actively pursue the opportunities created by increased labor market imperfections in recessions. These results contribute to the literature by highlighting how recessions affect firms’ flow of human capital investments, and subsequently stocks, depending on their weighting of the two dimensions of strategic entrepreneurship

Recessions give businesses time to improve — if governments let them

Rather than sit out the storm, this is the time to put excess capacity to good use, retaining and reallocating employees, write Peter Klein, Eirik Sjåholm Knudsen, Lasse Lien, and Bram Timmerman

Shadow of trouble : the effect of pre-recession characteristics on the severity of recession impact

The recent financial crisis has heightened the need to understand why some firms are more severely affected by recessions than others and how different firm and industry characteristics affect firms’ vulnerability to such shocks. To study these questions empirically, we complement secondary financial data with primary data from an extensive questionnaire about the effects of the recent recession distributed to 5000 Norwegian CEOs in late 2010. We find that high pre-recession operating profits make firms less vulnerable to recessions, while high pre-recession growth, pre-recession debt ratio, firm size, share of durable goods and level of vertical product differentiation make firms more vulnerable to recessions. When comparing effect sizes, we find that other characteristics than pre-recession profits are the most important determinants of the severity of recession impact. We argue that these results indicate that recession can cause the shape of fitness landscapes to change

Bad weather ahead: Pre-recession characteristics and the severity of recession impact

This paper addresses a simple question: why are some firms more severely affected by recessions than others? Using the Norwegian financial crisis of 2008 as an empirical setting, I find that firms pursuing pre-recession strategies with a high emphasis on innovation or cost-cutting are less likely to experience reduced demand during the recession. In the other direction, I find that firms pursuing a pre-recession strategy emphasizing quality, firms with high pre-recession growth, firms with many competitors, and firms selling durable goods are more likely to experience reduced demand during the recession. These findings imply that recessionary shocks are not randomly assigned to firms, which is valuable for future research on firm behavior and performance over the business cycle and for managers wishing to analyze the vulnerability of their own firms (or competing firms) to recessions.Bad weather ahead: Pre-recession characteristics and the severity of recession impactpublishedVersio

Bad weather ahead: Pre-recession characteristics and the severity of recession impact

This paper addresses a simple question: why are some firms more severely affected by recessions than others? Using the Norwegian financial crisis of 2008 as an empirical setting, I find that firms pursuing pre-recession strategies with a high emphasis on innovation or cost-cutting are less likely to experience reduced demand during the recession. In the other direction, I find that firms pursuing a pre-recession strategy emphasizing quality, firms with high pre-recession growth, firms with many competitors, and firms selling durable goods are more likely to experience reduced demand during the recession. These findings imply that recessionary shocks are not randomly assigned to firms, which is valuable for future research on firm behavior and performance over the business cycle and for managers wishing to analyze the vulnerability of their own firms (or competing firms) to recessions

Knowledge investments in recessions : the effects of demand and credit

We examine how recessions change firms’ knowledge investments. Unlike existing work we split the effects of recessions into demand reductions, and problems with access to credit. Our main findings are that investments in R&D and innovation are more sensitive to problems with access to credit than they are to reductions in demand. For investments in human- and organizational capital, the relationship is the opposite, i.e. they are more sensitive to demand reductions than access to credit. Furthermore, we hypothesize and find support for important nonlinearities in the effects of demand changes on investments in human and -organizational capital. For mild demand reductions these investments increase, but for strong demand reductions they decrease, and notably, they also decrease for firms that experience demand increases

Skjev eller bare hard? Økonomisk seleksjon i utider

Økonomisk seleksjon foregår ved at bedrifter konkurrerer seg i mellom i et marked. Konkurransen mellom dem – konkurransekreftene – danner en seleksjonsmekanisme som bestemmer hvilke selskaper som overleverer og vokser, og hvilke selskaper som krymper og dør. De selskapene som har høy (forventet) produktivitet har størst forutsetninger for å ha høy lønnsomhet og blir foretrukket av investorer (som får bedre avkastning på investeringene sine) og kunder (som får bedre/billigere produkter), mens bedrifter med lavere produktivitet sliter. Men hva skjer under en krise? Hva skjer med disse seleksjonsprosessene når negative økonomiske sjokk som finanskriser oppstår i en økonomi? Sørger markedskreftene fremdeles for at det er bedriftene med høyest forventet produktivitet som faktisk overlever? I denne artikkelen viser vi hvordan kriser kan ha to ulike effekter på seleksjon av bedrifter. Den første effekten er at konkurransen om å overleve tiltar og seleksjonskreftene blir sterkere, som igjen fører til at flere av de minst produktive selskapene dør. Den andre mulige effekten av en krise er såkalt skjevseleksjon hvor banker og andre kredittgivere tar over noe av rollen til markedet når det gjelder å velge ut hvilke selskaper som skal overleve. Vi finner at slik skjevseleksjon kan ha svært så negative konsekvenser for en økonomi på litt lengre sikt

Seleksjon i næringslivet

Næringslivet kan ses på som en stor seleksjonsmekanisme. På sitt beste er det en seleksjonsmekanisme som kontinuerlig reallokerer ressurser dit produktiviteten er høyest og til de beste nye ideene. For at denne seleksjonsprosessen skal fungere godt – det vil si skape produktivitetsvekst – må det være en balanse og arbeidsdeling mellom seleksjon i produktmarkedet og seleksjon i kapitalmarkedet. I produktmarkedet konkurrerer man om kundenes gunst. I kapitalmarkedet konkurrerer man om investorer og långiveres gunst. I denne artikkelen beskriver vi hvordan dette samspillet fungerer i normale perioder, og hvordan det bryter sammen og kan skape skjevallokering a la «survival of the fattest» i perioder som finanskriser og resesjoner