The profitability-growth nexus in the Mexican manufacturing industry

Abstract

Abstract This paper examines the Mexican manufacturing industry's profitability-growth relationship at the sectoral level, considering three theories: business growth causes profitability (classical), profitability explains business growth (evolutionary), or negative link as a rule (the managerialism view). Using a vector error correction model alongside quadratic and piecewise regression equations produced results estimating bidirectional causality. However, the impact of profitability on business growth, measured from employment, was positive and stronger than the impact of business growth on profitability. Meanwhile, using net sales as a growth factor indicated a negative impact. Thus, the findings confirmed the predictions of both evolutionary and managerialism theories. Although not specifically targeted at the firm level, this research does provide insight into the efficiency and profitability conditions that prevail within Mexican entrepreneurship. The paper's conclusions highlight a strong profitability-growth link in sectors shaped by smaller firms, suggesting suitable conditions for investment, competition, economic growth, and quality improvement.