What makes firms perform well?

In this paper, we investigate the role of three external factors in generating improved productivity performance in companies. These are product market competition, financial market pressure and shareholder control. We have found, using data from around 580 UK manufacturing companies, that all three of these are associated with some degree of increased productivity growth. More specifically, average rents normalised on value-added (an inverse measure of competition) are negatively related to (total factor) productivity growth, interest payments normalised on cash flow are positively related to future productivity growth and firms with a dominant external shareholder from the financial sector have higher productivity growth rates. Furthermore, there is some evidence to suggest that the last two factors can substitute for competition.