New research co-authored by University of Pennsylvania academics challenges a core assumption in economics: That the most successful companies achieve their dominance purely through superior productivity. Instead, this study highlights the important role of scalability—how well firms can grow as they add resources—in explaining why the largest companies stay on top.

“We tackle a central question in firm dynamics: Are larger firms more productive, or do they just have more scalable technologies?” says Sergio Salgado, assistant finance professor at Wharton.

By focusing on differences in how a company scales, or “returns to scale” (RTS), Salgado, Joachim Hubmer, an assistant economics professor at the University of Pennsylvania, and the other authors of the study shed light on the more varied ways that firms produce goods and expand. In doing so, they provide insights for policymakers, investors, and business leaders.

 …