The sources of heterogeneity in firm performance: lessons from Italy1

Abstract An extensive body of literature documents large and persistent within-industry heterogeneity of firm performance. While some authors explain such evidence in terms of input misallocation, we provide an alternative analytical framework that integrates insights from resource-based and institutional approaches. We interpret firms’ behaviour as the result of the interaction among exogenous and endogenous factors. Exogenous factors, both supply and demand related, define the opportunity set that is available to firms. Endogenous factors reflect instead firm-specific interpretations of such set, which, combined with the available resources and capabilities, determine a firm’s strategic responses, which can be markedly heterogeneous. Whenever the diversity of firm conducts is associated with relatively small profit differentials, firm heterogeneity can persist. Evidence based on the evolution of labour productivity and profit dispersion in the Italian manufacturing sector between the 1990s and early 2000s provides support for our interpretative framework.