The Dynamic Performance of Australian Enterprises

Melbourne Institute Working Paper No. 03/02

Date: April 2002


Derek Bosworth
Joanne Loundes


This paper investigates the interaction of discretionary investments (R&D, capital investment, training and advertising), innovation, productivity and profitability within a dynamic framework of firm performance. A dynamic and closed model of firm performance is set up, and the resulting empirical model is tested as a series of recursive equations, using a four-year balanced panel data set of Australian firms drawn from the Business Longitudinal Survey. The results indicate that current economic profit has an important role to play in enabling firms to invest, and the findings indicate which of these investments are complements and which are substitutes. The paper explores the impact of these discretionary investments on innovation and total factor productivity performance. Finally, the impact of past discretionary investments both directly and indirectly (that is, via innovation and productivity performance) on current profitability is examined. Past values of these investments have a significant influence on current profit, effectively closing the model. The various results enable the paper to draw a number of other policy conclusions, in particular, some concerns about the potentially negative impact of own-market share on dynamic performance.

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