Is Sustainable Performance Explained by Firm Effect in Small Business?

Abstract

To what extent a firm’s resources (firm effect) and the structure of the sector (industry effect) are sources of a firm’s competitiveness has been debated for years in strategic management. Most of the empirical studies carried out have focused on large firms and have used static performance measures, and in them the firm effect generally outweighs the industry effect. This research contributes to this debate in trying to verify whether the competitive advantage that relies on the firm’s resources is sustainable, especially in small firms. We used a sample of almost 15,000 Spanish firms to test the impact that the firm and the industry effects have on sustainable performance, for both small and large firms, applying hierarchical linear modelling with a variable measured through time-varying parameters. Our results confirm the absolute importance of the firm effect on sustainable organizational performance, regardless the firm size, and show that, even though the industry effect has little weight in explaining sustainability, it is significantly higher in the case of small firms. This means that managers must concentrate efforts on providing their firm with the necessary resources to achieve a competitive advantage while choosing a good sector to position itself.