Heterogeneity in the demand-growth relationship at the firm level: the role of demand sources and innovation/knowledge characteristics

This work investigates whether different demand sources (i.e. demand for the firms’ output from households, other firms and the public sector) have different effects on firms’ employment growth and whether the growth effects of the demand sources vary by the firms’ innovation/knowledge characteristics. Relying on a representative sample of Italian companies observed between 2012 and 2017, we find that companies serving prevalently other firms or the government as their main demand source tend to grow faster than firms selling final goods to households. However, the growth advantage is more robust for firms serving prevalently other firms as their main demand source. We also find that the relative growth advantage is more pronounced among innovation-intensive and knowledge-intensive firms supplying other firms prevalently. Our findings are robust to the inclusion of firm-level controls and time, sectoral and geographical dummies. Confirming one of the major insights of both the Keynesian and the Schumpeterian traditions, demand emerges as a key driver of growth, the effects of which are mediated by the firms’ innovation/knowledge characteristics.