The relationship between growth and profitability revisited - Exploring different modes of growth

Abstract

Growth represents an essential element to the entrepreneurial journey as it reflects the recognition and pursuit of opportunities. However, despite prior research, the relationship between growth and profitability still remains illusive. With an attempt to inform a new understanding of this relationship, we examine its non-linear character through decomposing growth into organic and acquisitive modes and theorize the way in which these modes shape profitability. Further, we propose that these modes can affect profitability through their interaction with each other. We study these relationships with a panel of established German companies over 13 years to uncover an inverted U-shaped relation between growth and profitability, mainly driven by acquisitive growth, but organic growth has a declining positive effect. The interaction of both growth modes shows a negative impact of acquisitive growth on the positive performance effect of organic growth. Furthermore, we conduct post-hoc tests that reveal a contrast to how younger and smaller firms realize different trajectories of profitability depending on their mode of growth.