What drives firm profitability? A multilevel approach to the Spanish agri-food sector

Ferdaous Zouaghi, Mercedes Sánchez-García, Stefan Hirsch


Strategic management research has demonstrated the importance of firm- and industry structure as drivers of firm profitability. However, less is known about how firms´ geographical locations affect profitability. Applying a multi-level approach of hierarchical linear modeling we estimated firm-, industry-, and region-specific effects on profitability of 3,273 agri-food firms operating in different Spanish districts over the time span 2006-2013. The results reveal the dominance of firm-specific effects which contribute up to 48.8% to variance in firm profitability while the contribution of industry effects (0.8-4.2%), geographical location (0.1-1.8%), and year effects (0.1-2.5%) is rather small. Moreover, firm size, risk, and innovative activity turn out as significant profit drivers at the firm level. Although firm-effects outweigh industry- and region-specific factors, the results indicate that industry concentration as well as regional education and unemployment influence profitability. In addition, proximity to technological institutes as well as the degree of urbanization of the region in which a firm operates can be drivers of profitability. Hence, despite the superiority of firm effects the results indicate that agri-food managers should also consider possible advantages from location-based resources in order to ensure competitiveness.


agri-food profits; firm-, industry-, and location effects; hierarchical linear model

Full Text:



Alarcón S, Sánchez M, 2013. Business strategies, profitability and efficiency of production. Span J Agric Res 11(1): 19-31. https://doi.org/10.5424/sjar/2013111-3093

Bain J, 1956. Barriers to new competition. Harvard University Press, Cambridge, MA, USA. https://doi.org/10.4159/harvard.9780674188037

Barney JB, 1991. Firm resources and sustained competitive advantage. J Manage 17 (1): 99-120. https://doi.org/10.1177/014920639101700108

Bekeris R, 2012. The impact of macroeconomic indicators upon SME's profitability. Ekonomika 91(3): 117-128.

Bhuyan S, McCafferty M, 2013. U.S: Brewing industry profitability: A Simultaneous determination of structure, conduct and performance. J Agr Food Indus Organ 11 (1): 139-150. https://doi.org/10.1515/jafio-2013-0008

Biddle G, Bowen R, Wallace J, 1997. Does EVA beat earnings? Evidence on associations with stock returns and firm values. J Account Econ 24 (3): 301-336. https://doi.org/10.1016/S0165-4101(98)00010-X

Boix R, Galletto V, 2005. Identificación de sistemas locales de trabajo y distritos industriales en España. Dirección General de Política de la Pequeña y Mediana Empresa. http://www.ipyme.org/Publicaciones/IdentificacionSLT.pdf [March 2015].

Bowman EH, 1980. A risk/return paradox of strategic management. Sloan Manage Rev 21 (3): 17-31.

Brakman S, Garretsen H, van Marrewijk C, 2009. The new introduction to geographical economics (2nd ed). Cambridge Univ Press, Cambridge. https://doi.org/10.1017/CBO9780511818745

Caixa, 2013. Spanish Statistical Yearbook. Instituto Nacional de Estatistica, Madrid.

Chaddad FR, Mondelli MP, 2013. Sources of firm performance differences in the US food economy. J Agr Econ 64: 382-404. https://doi.org/10.1111/j.1477-9552.2012.00369.x

Chan CM, Makino S, Isobe T, 2010. Does sub-national region matter? Foreign affiliate performance in the United States and China. Strategic Manage J 31 (11): 1226-1243. https://doi.org/10.1002/smj.854

Ciccone A, Cingano F, 2003. Skills and clusters. In: Innovation clusters and interregional competition; Brocker J, Dohse D, Soltwedel R., (eds.). Springer, Berlin https://doi.org/10.1007/978-3-540-24760-9_11

Claver E, Molina J, Tarí J, 2002. Firm and industry effects on firm profitability : A Spanish empirical analysis. Eur Manage 20 (3): 321-328. https://doi.org/10.1016/S0263-2373(02)00048-8

Delmar F, McKelvie A, Wennberg K, 2013. Untangling the relationships among growth, profitability and survival in new firms. Technovation 33 (8-9): 276-291. https://doi.org/10.1016/j.technovation.2013.02.003

Duranton G, Henderson JV, Strange WC (eds), 2015. Handbook of regional and urban economics (Vol. 5). Elsevier, Amsterdam.

Elango B, Wieland RJ, 2014. How much does region affect performance? Multin Busin Rev 22(1): 4-14. https://doi.org/10.1108/MBR-10-2013-0061

Enqvist J, Graham M, Nikkinen J, 2014. The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Res Int Busin Financ 32: 36-49. https://doi.org/10.1016/j.ribaf.2014.03.005

Erkan A, Fainshmidt S, Judge WQ, 2015. Variance decomposition of the country, industry, firm, and firm-year effects on divided policy. Int Bus Rev 25 (6): 1309-1320. https://doi.org/10.1016/j.ibusrev.2016.04.003

Eurostat, 2015. Structural Business Statistics. http://ec.europa.eu/eurostat/web/structural-business-statistics/data/database

Faggian A, McCann P, 2009. Human capital, graduation migration and innovation in British regions. Cambridge J Econ 33 (2): 317-333. https://doi.org/10.1093/cje/ben042

Fairlie R, 2013. Entrepreneurship, economic conditions, and the great recession. J Econ Manage Strat 2: 207-231. https://doi.org/10.1111/jems.12017

Fearne A, García Álvarez-Coque JM, López García Usach T, Sánchez García M, 2013. Innovative firms and the urban/rural divide: the case of agro-food system in the Valencia region. Manage Decis 51 (6): 1293-1310. https://doi.org/10.1108/MD-12-2011-0482

Fisher FM, McGowan JJ, 1983. On the misuse of accounting rates of return to infer monopoly profits. Am Econ Rev 73: 82-97

Food Drink Europe, 2013. Data & trends of the European food and drink industry 2012. Food Drink Europe: Brussels, Belgium.

Gaganis C, Liu L, Pasiouras F, 2015. Regulations, profitability, and risk-adjusted returns of European insurers: An empirical investigation. J Financ Stabil 18: 55-77. https://doi.org/10.1016/j.jfs.2015.03.001

García-Alvarez-Coque JM, López-García, Usach T, Sanchez-García M, 2013. Determinants of Agri-food Firms' Participation in Public Funded Research and Development. New Medit 12 (3): 2-10.

GdN, 2015. Contabilidad trimestral de Navarra (cuarto trimestre 2015). Gobierno de Navarra. www.navarra.es.

Giuliani E, Morrison A, Pietrobelli C, Rabellotti R, 2010. Who are the researchers that are collaborating with industry? An analysis of the wine sectors in Chile, South Africa and Italy. Res Policy 39: 748-761. https://doi.org/10.1016/j.respol.2010.03.007

Giusti A, Grassini L, 2007. Local labor systems and agricultural activities: The case of Tuscany. Int Adv Econ Res 13(4): 475-487 https://doi.org/10.1007/s11294-007-9112-0

Goddard J, Tavakoli M, Wilson JOS, 2005. Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model. Appl Financ Econ 15(18): 1269-1282. https://doi.org/10.1080/09603100500387139

Goddard J, Tavakoli M, Wilson JOS, 2009. Sources of variation in firm profitability and growth. J Bus Res 62: 495-508. https://doi.org/10.1016/j.jbusres.2007.10.007

Goldszmidt RGB, Brito LAL, de Vasconcelos FC, 2011. Country effect on firm performance: A multilevel approach. J Bus Res 64 (3): 273-279. https://doi.org/10.1016/j.jbusres.2009.11.012

Grant RM, Nippa M, 2006. Strategisches Management. Analyse, Entwicklung und Implementierung von Unternehmensstrategien. Pearson Studium, Munich, Germany.

Grau AJ, Reig A, 2015. Vertical integration and profitability of the agrifood industry in an economic crisis context. Span J Agric Res 13(4): 1-14. https://doi.org/10.5424/sjar/2015134-7487

Gschwandtner A, 2005. Profit persistence in the 'very' long run: evidence from survivors and exiters. Appl Econ 37 (7): 793-806. https://doi.org/10.1080/0003684042000337406

Hirsch S, 2014. Abnormal profits and profit persistence: evidence from the European food industry. Dissertation University of Bonn.

Hirsch S, Gschwandtner A, 2013. Profit persistence in the food industry: evidence from five European countries. Eur Rev Agr Econ 40 (5): 741-759. https://doi.org/10.1093/erae/jbt007

Hirsch S, Hartmann M, 2014. Persistence of firm-level profitability in the European dairy processing industry. .Agr Econ 45 (S1): 53-63. https://doi.org/10.1111/agec.12129

Hirsch S, Schiefer J, 2016. What causes firm profitability variation in the EU food industry? A redux of classical approaches of variance decomposition. Agribusiness 32 (1): 79-92. https://doi.org/10.1002/agr.21430

Hirsch S, Schiefer J, Gschwandtner A, Hartmann M, 2014. The determinants of firm profitability differences in EU food processing. J Agr Econ 65 (3): 703-721. https://doi.org/10.1111/1477-9552.12061

Hough JR, 2006. Business segment performance redux: A multilevel approach. Strat Manage J 27: 45-61. https://doi.org/10.1002/smj.498

Hox J, 2008. Multilevel analysis, techniques and applications. Psychology Press, Hove, UK.

INE, 1991. Cifras de población y censos demográficos. http://www.ine.es/jaxi /menu.do?type=pcaxis&path=%2Ft20%2Fe243&file=in ebase&L=0 [March 2015].

INE, 2001. Censos de población y viviendas de 2001. http://www.ine.es/censo2001 [March 2015].

INE, 2011a. Contabilidad regional de Espana. http://www.ine.es/prensa/np695.pdf [March 2015].

INE, 2011b. Censos de población y viviendas 2011. http://www.ine.es/censos2011 _datos/cen11_datos_inicio.htm [March 2015].

ISTAT, 1991. I sistemi locali del lavoro. Istituto nazionale di statistica, Rome

Jacobs J, 1969. The economies of cities. Random House, NY.

Ketelhöhn NW, Quintanilla C, 2012. Country effects on profitability: A multilevel approach using a sample of Central American firms. J Bus Res 65 (2): 1767-1772. https://doi.org/10.1016/j.jbusres.2011.10.036

Lasagni A, Nifo A, Vecchione G, 2015. Firm productivity and institutional quality: Evidence from Italian industry. J Reg Sci 00 (0): 1-27. https://doi.org/10.1111/jors.12203

Lee J, 2000. The robustness of Okun's law: Evidence from OECD countries. J Macroecon 22 (2): 331-356. https://doi.org/10.1016/S0164-0704(00)00135-X

Lienhardt J, 2004. The food industry in Europe. Statistics in focus 39/2004. European Communities, Luxembourg.

Loderer C, Waelchli U, 2010. Firm age and performance. Working paper, University of Bern, Bern, Switzerland.

Long WF, Ravenscraft DJ, 1984. The usefulness of accounting profit data: A comment on Fisher and McGowan. Am Econ Rev 74: 494-500.

Lu Y, Tao Z, Yu L, 2012. Agglomeration and markup. MPRA Paper 38974.

Luke DA, 2004. Multilevel modeling. Sage Publ, Thousand Oaks, CA, USA. https://doi.org/10.4135/9781412985147

McGahan AM, Porter IE, 1997. How much does industry matter, really? Strat Manage J 18: 15-30. http://dx.doi.org/10.1002/(SICI)1097-0266(199707)18:1+%3C15::AID-SMJ916%3E3.3.CO;2-T

McNamara G, Aime F, Vaaler PM, 2005. Is performance driven by industry‐ or firm‐specific factors? A response to Hawawini, Subramanian, and Verdin. Strat Manage J 26 (11): 1075-1081. https://doi.org/10.1002/smj.496

Melia E, Julia JF, Martinez A, 2010. Mergers of agrifood cooperatives and their effects: from expectations to results. An empirical study in four Spanish autonomous Regions. Span J Agric Res 8 (2): 235-250. https://doi.org/10.5424/sjar/2010082-1185

Melitz M, Ottaviano G, 2008. Market size, trade, and productivity. Rev Econ Stud 75: 295-316. https://doi.org/10.1111/j.1467-937X.2007.00463.x

Misangyi VF, Elms H, Greckhamer T, Lepine JA, 2006. A new perspective on a funda- mental debate: A multilevel approach to industry, corporate and business unit effects. Strat Manage J 27: 571-590. https://doi.org/10.1002/smj.530

Molina-Azorin JF, Pereira-Moliner J, Claver-Cortés E, 2010. The importance of the firm and destination effects to explain firm performance. Tourism Manage 31 (1): 22-28. https://doi.org/10.1016/j.tourman.2009.02.009

OECD, 1994. Creating rural indicators for shaping territorial policies. OECD Publ, Paris.

OECD, 2010. Measuring innovation: A new perspective. OECD Innovation Strategy. OECD France, Paris.

Ollinger M, Nguyen SV, Blayney D, Chambers W, Nelson K, 2005. Effects of food industry mergers and acquisitions on employment and wages. USDA, Washington.

Pattitoni, P, Petracci B, Spisni M, 2014. Determinants of profitability in the EU-15 area Determinants of profitability in the EU-15 area. Appl Financ Econ 24 (11): 763-775. https://doi.org/10.1080/09603107.2014.904488

Penrose ET, 1959. The theory of the growth of the firm. John Wiley & Sons, NY.

Pindado E, Alarcon S, 2015. Quality strategies and profitability: a multilevel analysis in the meat industry. In: Business strategies. Types, benefits and effects on firm performance; Porter C (ed), Nova Publisher, Hauppauge, NY.

Porter ME, 1980. Competitive strategy. Techniques for analyzing industries and competitors. Free Press, NY.

Rassier DG, Earnhart D, 2015. Effects of environmental regulation on actual and expected profitability. Ecol Econ 112: 129-140. https://doi.org/10.1016/j.ecolecon.2015.02.011

Raudenbush S, Bryk AS, 2002. Hierarchical linear models: Applications and data analysis methods (Advanced Quantitative Techniques in the Social Sciences), 2nd ed. Sage, Thousand Oaks, CA, USA.

Ricardo D, 1817. Principles of political economy and taxation. Prometheus Books, Amherst, NY.

Rumelt RP, 1991. How much does industry matter? Strat Manage J 12 (3): 167-185. https://doi.org/10.1002/smj.4250120302

Sahaym A, Nam D, 2013. International diversification of the emerging-market enterprises: A multi-level examination. Int Bus Rev 22 (2): 421-436. https://doi.org/10.1016/j.ibusrev.2012.06.002

Schiefer J, 2011. Was bestimmt die Rentabilität in der Lebensmittelindustrie? Eine empirische Analyse unternehmensinterner und -externer Effekte. Hamburg, Germany: Verlag Dr. Kovac.

Schumacher S, Boland M, 2005. The effects of industry and firm resources on profitability in the food economy. Agribusiness 21 (1): 97-108. https://doi.org/10.1002/agr.20033

Searle SR, Casella G, McCulloch CE, 2006. Variance components. John Wiley & Sons, NY.

Short JC, Ketchen JD, Bennett N, Du Toit M, 2006. An examination of firm, industry, and time effects on performance using random coefficients modeling. Org Res Meth 9(3): 259-284. https://doi.org/10.1177/1094428106287572

Stone A, Rose S, Lal B, Shipp S, 2008. Measuring innovation and intangibles: A business perspective. Science and Technology Policy Institute, IDA Document D-3704.

Sutton J, 1991. Sunk costs and market structure: Price competition, advertising, and the evolution of concentration. MIT Press, Cambridge.

Tamminen S, 2016. Regional effects or none? Firms`profitability during the Great Recession in Finland. Papers in Regional Science.

Usai S, Paci R, 2003. Externalities and local economic growth in manufacturing industries. In European Regional Growth; Fingleton B (ed). Springer, Berlin. https://doi.org/10.1007/978-3-662-07136-6_11

Valencia Generalitat, 2015. Datos estadísticos básicos de la Communitat Valenciana Generalitat Valenciana Region. www.pegv.gva.es/dbcv

Welge MK, Al-Laham A, 2008. Strategisches Management. Gabler, Wiesbaden, Germany.

Wijnands JHM, van Der Meulen JBM, Poppe KJ, 2007. Competitiveness of the European food industry: An economic and legal assessment 2007. European Commission, Luxembourg.

World Bank, 2015. Agriculture, value added (% of GDP). http://data.worldbank.org /indicator/NV.AGR.TOTL.ZS [March 2015].

Yurtoglu BB, 2004. Persistence of firm-level profitability in Turkey. Appl Econometr 36: 615-625. https://doi.org/10.1080/0003684042000217652

DOI: 10.5424/sjar/2017153-10713