Firm versus Sector Effects on Profitability and Growth: The Importance of Size and Interaction

In this study we contribute to the long-standing debate on the impact of firm versus industry effects on firm performance in three distinct ways; firstly by testing the firm, industry and their interaction effects on performance, secondly by examining the impact of each effect for different size groups, and lastly by measuring performance in terms of sales growth in addition to profitability. We use data of 71,750 UK firms, between 2002 and 2004, and employ moderated regression analysis for three sub-samples namely micro, SMEs and large firms. With regards to profitability, we find the interaction effect to be significant in all sub-samples for broad level of industrial aggregation (SIC4). For narrow industrial aggregation (SIC2), the interaction effect is only significant for micro firms. Neither of the above effects is significant for sales growth.