The Verdoorn law, firm strategy and firm performance

In many markets and firms, positive feedback effects play an important role. Positive feedback effects mean that there is a tendency for that which is ahead to get further ahead, and for that which loses advantage to lose further advantage (Arthur, 1996). Such positive feedback effects result from four mechanisms: (1) social interaction effects; (2) network effects; (3) scale effects; and (4) learning effects. Of these mechanisms social interaction effects and network effects are market-bound, while scale effects and learning effects are firm-bound (Den Hartigh and Langerak, 2001). Prior research has highlighted the influence of market-bound positive feedback mechanisms on market structure and market outcomes, but has largely ignored the impact of firm-bound positive feedback mechanisms on firm performance. In this study we aim to fill a part of this gap in extant knowledge by: (1) investigating the extent to which Dutch firms listed on Euronext have been able to exploit scale and learning effects between 1983 and 2002; (2) examining the extent to which the realization of scale and learning effects has affected firms’ performance during this period; and (3) investigating the competitive strategies used by firms to increase their productivity and performance. This will enable us to assess the success of these strategies and to advise firms as to how they should change their strategy in order to become more successful by making better use of productivity gains.