International Journal of Emerging Markets

Cross-Classified Multilevel Determinants of Firm’s Sales Growth in Latin America

Luiz Paulo Lopes Fávero, Ricardo Goulart Serra, Marco Aurélio dos Santos, Eduardo Brunaldi,
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Luiz Paulo Lopes Fávero, Ricardo Goulart Serra, Marco Aurélio dos Santos, Eduardo Brunaldi, "Cross-Classified Multilevel
Determinants of Firm’s Sales Growth in Latin America", International Journal of Emerging Markets, https://doi.org/10.1108/
IJoEM-02-2017-0065
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 Cross-Classified Multilevel Determinants of Firm’s Sales Growth
in Latin America

Structured Abstract

Purpose: This paper analyses the influence of firm-, industry- and country-level determinants on real
annual sales growth in the context of a cross-classified multilevel perspective.
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Design/methodology/approach: We studied 11,381 firms from 17 industries in six Latin American

countries based on data collected up to 2015. Since the data are nested in two levels (level 1: firms;
level 2: cross-classification of industries and countries), we use a cross-classified multilevel model.
The significant variability in all levels of analysis confirms the option for the multilevel model.

Findings: Differences in industries account for the largest proportion of variance (77.2%). This
finding indicates that industry-level characteristics should be explored in the sales growth literature (it
seems to us that they were neglected). This finding also calls attention to the roles of policy makers in
facilitating firm growth. The final model indicates that the considered variables explain approximately
55% of the differences in real annual sales growth in the same industry and country after having
accounted for the impacts of the differences in firms. After accounting for the impacts of the
differences in firms’ and countries’ characteristics, 43% of the variation in average real annual sales
growth is due to differences in industries. The obtained results indicate that while firms from countries
with higher GDP growth and more effective corporate boards present higher real annual sales growth,
firms that operate in commodity producer industries have worse performance in this indicator. With
respect to firm’s characteristics, larger firms (contradicting Gilbrat's law) and exporters grew less.
Some results could be explained by the decrease in commodities' prices and global purchases between
2012 and 2015.

Originality/value: We fill some gaps in the firm growth literature by (i) testing Gilbrat’s law in non-
developed countries (not yet done, to the best of our knowledge) and (ii) exploring variables other than
size in the explanation of firm growth (rarely used, to the best of our knowledge). Moreover, the
adopted model correctly estimated the origin of the variability in firm growth in its natural cross-
classified distinct levels.
 Keywords: Sales Growth; Gibrat’s Law; Latin America; Cross-Classified Multilevel Models; Country
Level; Industry Level; Firm Level.

Article Classification: Research paper.

1. Introduction

Sales growth is one of the most important performance indicators; it describes

(i) industry competitiveness, (ii) market opportunities and how firms are strategically
positioned to add value, (iii) the ability of the firm to continue its activities and (iv) the
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relative performance of the firm among its peers. An analysis of sales growth can help
(i) perceive eventual changes in a firm’s strategy, (ii) equity pricing (Swaminathan and
Weintrop, 1991; Lakonishok et al., 1994; Ertimur et al., 2003; Jegadeesh and Livnat, 2006;
Chandra and Ro, 2008; Serra and Martelanc, 2014; Srivastava, 2014; Serra and Fávero, 2017)
and (iii) design bonus contracts – not only because of its relatively more informative nature
regarding firm value than earnings but also because firms follow a growth-focused
organization strategy (Huang et al., 2015). Thus, one of the main goals of companies’ leaders
is to maximize revenue and constantly increase sales (Baumol, 1959; Sam and Hoshino,
2013).

Therefore, the objective of our paper is to identify the determinants of sales growth in
emerging markets. Since organization theory suggests that firms’ characteristics and its
environment interacts with firm-internal strategic orientation (Short et al., 2008; Leichning et
al., 2016), we are going to investigate firm-level (firms’ characteristics), industry-level and
country-level (environment's characteristics) determinants in sales growth’s explanation.

With respect to firms’ characteristics, since Gilbrat (1931) suggested that firm growth
is independent of its size, several studies tried to identify the role of size in sales growth.
Some of them indicate that size relates to sales growth (e.g., Delmar et al., 2003). The
relationship between firm size and firm growth is not yet conclusive.

With respect to the environment, a firm is part of a determined industry in a country of

origin. The environment can play a common role in firm growth for firms within the same
context since they share similar structural characteristics and are similarly affected by
institutional features. In other words, firms from the same industry (or country) will be
commonly affected by industry’s characteristics (or country’s economic and institutional
characteristics). Therefore, traditional techniques’ assumption of independent observations is
2
 not granted. This hypothesis and others led us to choose for a multilevel model. Another
complexity to be addressed in our research is the fact that industries and countries are blurred
together in a mixed context, making it necessary to adopt a cross-classified two-level model
(level 1: firm and level 2: cross-classification of industries and countries). Therefore, we
propose two main hypotheses for this research for emerging markets countries:

• Hypothesis 1: There are differences in sales growth due to the impact of

differences in firms from the same industry and country.
• Hypothesis 2: After accounting for the impact of the differences in firms’ and
countries’ characteristics, there is significant variation in sales growth due to
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differences in industries.

The understanding that the sales growth of firms from the same context are
homogeneously impacted by their environment (to a certain extent) can help better assess
(i) investment decisions (to which country should the firm direct its investments?), (ii) firm
valuation (to which firms does a specific firm compare in order to value it?) and (iii) bonus
contracts (to what extent are company’s executives in control of sales growth, and are they
equally in control of sales growth regardless of the country of their operations?).

In addition to the above, this study adds to the emerging markets literature evidence of
a heterogeneous effect on the sales growth of firms in emerging markets, since it is not
common to find studies that simultaneously compare performance indicators among firms
from different industries and different economies (Serra and Fávero, 2017).

We have studied 11,381 firms from 17 industries in six Latin American countries
(Argentina, Brazil, Chile, Colombia, Mexico and Peru) between 2012 and 2015. Our results
indicate that while 16.1% of the total variability of sales growth is due to firm-determinants,
77.2% is due to industry-determinants, and 6.7% is due to country-determinants, with all
variance parameters statistically significant. Such results indicate that the choice of the cross-
classified multilevel model is correct, since the variance is significant in each level of the
analysis. Our model contributes to the studies that suggest that small firms have higher
growth, and exporters grew less in the analyzed period. With respect to environmental
determinants, our empirical findings suggest that while firms from countries with higher GDP
growth and more effective corporate boards have higher real annual sales growth, firms that
operate in commodity producing industries have worse performance in this indicator. The

3
 latter result could be explained by the decrease in commodities’ prices and global trading
between 2012 and 2015.

The paper is structured as follows. Section 2 presents the literature review focused on
the level determinants and on Gibrat’s Law. Building on this framework, Section 3 offers a
discussion regarding the managerial contributions of our findings. Section 4 explains the
empirical approach, including the sample, cross-classification characteristics of data, variable
definitions and sources, and the estimating multilevel model. Section 5 discusses the findings
and the estimation approach, and Section 6 presents the results. Section 7 provides an
elucidation of our findings and conclusions. The appendix details the cross-classified
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multilevel model.

2. Literature Review

Companies use performance variables to measure, manage, and communicate results.

These are often called key performance indicators and include financial measures such as
sales growth, profit margin, investment levels, asset turnover, return on assets and/or equity
(Mauboussin, 2012). Several studies identified that firm, industry and country characteristics
(herein called determinants) affect companies’ performance and structure (La Porta et al.,
1998; Rahaman, 2011; Kayo and Kimura, 2011; Lucey and Zhang, 2011; Fávero and
Sotelino, 2011; Vassolo, 2012; Cenni et al., 2015; Lee et al., 2013; Goedhuys and
Sleuwaegen, 2013; Gao and Zhu, 2015; Santos et al., 2016; Leischnig et al., 2016; Nanda and
Panda, 2018). Traditional financial statements provide useful quantitative financial
information to both experts and investors to evaluate company operations and analyze its
position within a certain time (Sam and Hoshino, 2013). As stated in Doyle (1994), the use of
one or more performance indicators primarily depends on the purpose of the research.

Companies’ growth is one of the most important measures to be observed in

companies and market development for future projects. It can be measured by cash flow
growth, earnings growth or sales growth. Lakonishok et al. (1994) argue that sales growth is
preferable to earnings or cash flow growth since it is less volatile. The ability of sales growth
to substitute for accounting earnings as a measure of firm performance appears to be a
function of its relatively greater persistence, as shown by Jegadeesh and Livnat (2006),
Armstrong et al. (2011) and Huang et al. (2015).

4
 2.1. Level Determinants

At the firm level, size is an important driver of firm performance and is commonly
used in corporate finance. Size is positively associated with transparency (Kayo and Kimura,
2011) and portfolio diversification (Titman and Wessels, 1988), and these authors suggest a
positive relationship between size and firm performance. However, since size is an
endogenous variable, the literature provides theoretical arguments to support a negative
relationship between size and performance. In this sense, according to the agency theory
(Jensen and Meckling, 1976) perspective, larger firms tend to be less efficient than small
firms since (i) the former group may be a result of managers’ empire building bias and (ii) the
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latter can induce higher levels of management effort. In other words, small firms resolve the
severe agency problems of hidden information and hidden behavior in research and
development (R&D) by offering more efficient contracts that reward performance than large
firms (Zenger, 1994; Bennett and Levinthal, 2017).

At the industry level, previous studies have evidenced that firms from the same
industry share similar influences on their performances. Firms within the same industry share
similar structural characteristics, such as R&D and commodities industries. In this sense,
Brown and Petersen (2009) label R&D industries/firms as 'equity dependent', since the risky
nature of this investment is shared by all firms within these industries and influences firms’
decisions and performance. Additionally, institutional features similarly affect firms from a
given industry (Simerly and Li, 2000). For instance, Ovtchinnikov (2010) evidenced that,
after an industry deregulation, firms within the deregulated industry experience similar and
significant effects in performance and leverage.

At the country level, many papers have shown how institutional characteristics affect
firms’ decisions (Koracjzyk and Levy, 2003; Oztekin and Flannery, 2012), regardless of the
industry to which the firm belongs. In general terms, there are some reasons for the existence
of a country effect on firms’ performance, such as the country of origin bias over domestic
trade, the relationship between domestic investment and domestic savings, and possible
investor preference for domestic firms’ financial assets (Ghemawat, 2003; Hawawini et al.,
2003, 2004; Goldszmidt et al., 2007; Serra and Fávero, 2017). In this sense, the activities of
firms are strongly dependent on the economic, legal and bureaucratic environment of their
country of origin.

5
 One important determinant refers to the quality of the institutions of a given country,
which is usually proxied by property rights and the quality of corporate governance at the
institutional level. The literature has scrutinized the effect of both on the firm’s performance.
Countries where property rights are well defined usually have more developed capital markets
(La Porta et al., 1997), since investors tend to allocate resources where their rights are
properly protected. La Porta et al. (1997), La Porta et al. (1998) and Levine (1997) use the
legal system to capture this effect. Therefore, a higher quality of these practices (corporate
governance) implies a better performance. For instance, Bhagat and Bolton (2008) and Santos
et al. (2016) show a positive correlation between corporate governance and operating
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performance. Another important determinant of firms’ performance is the economic

condition, as stated in de Jong et al. (2008) and Kayo and Kimura (2011).

Moreover, there are the effects of industry-country interactions, since companies

operating in certain industries may perform better (or worse) in certain countries. This
interaction may be due to differences in national competitive advantages related to industrial
structures and the type of national business framework (Haake, 2002; Goldszmidt et al.,
2007).

2.2. Gibrat’s Law

The Law of Proportionate Effect (hereafter, Gibrat’s Law) states that a firm’s growth
prospects are independent of its initial size (Mansfield, 1962; Eeckhout, 2004) (i.e., small and
large firms have the same ex-ante probability of growth (or shrinking)). In formal terms,
McCloughan (1995) represents the law as:

xi,t = xi,t −1.exp ui,t  (1)

where xi,t is firm i's size in the year t, xi,t-1 is the firm’s initial size and ui,t is the firm’s
growth rate.

Over the last 60 years, many papers have tested the validity of this law. So far, the
relationship between growth and size has not reached a consensus. McCloughan (1995)
showed that previous literature reported five standards of Gibrat’s law violations 1 . Some

1
The standards categorized by McCloughan (1995) are as follows: (1) small firms grow faster than large ones
(e.g. Dunne and Hughes, 1994), (2) large firms grow faster than small firms (e.g. Samuels, 1965; Prais, 1976),
(3) growth variability decreases with size (e.g. Hall, 1987), (4) growth variability decreases with age (e.g. Evans,

6
 researchers who studied firm growth in different size groups suggest that Gibrat’s law of size
independence only holds for firms above a certain size threshold, such as those with a
relatively large size of over 400 employees (Bigsten and Gebreeyesus, 2007).

Samuels (1965) documented that large firms grow faster than smaller firms. He
overlooked dead and new firms, and thus, his results may suffer from sample selection bias.
However, the author justified his procedures by alleging the low quantitative relevance of the
neglected firms (Hart and Prais, 1956).

Several studies document the opposite by showing that small firms grow relatively
faster (Hall, 1987; Evans, 1987a; Dunne et al., 1989; Variyam and Kraybill, 1992; Dunne and
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Hughes, 1994; McPherson, 1996; Almus and Nerlinger, 2000; Goddard et al., 2002; Yasuda,
2005; Bottazzi and Secchi, 2006; Calvo, 2006; Carvalho, 2008). Some explanations for that
behavior are that small firms (i) have to achieve a minimum efficient size (Audretsch et al.,
2004), (ii) can make faster decisions (Chen and Hambrick, 1995) and (iii) respond faster to
business opportunities (Steffens et al., 2009; Darnall et al., 2010; Leischnig et al., 2016).

There are also studies that corroborate Gilbrat’s law, such as Fariñas and Moreno
(2000) and Fujiwara et al. (2010). In fact, the latter authors’ results reinforce the suspicion of
sample selection bias in the prior literature that the mean growth rate of non-failing firms
decreases with size. However, when the authors use both failing and non-failing firms, “the
differences in growth rates across the size of the firms are not statistically significant”
(p. 259).

Even though Gibrat’s law literature is extensive, it presents relevant gaps. While the
relationship between firm size and growth has been scrutinized in developed countries, few
papers analyze the relationship between firm size and growth in developing and emerging
markets. In this sense, Nassar et al.’s (2014) bibliometric study reveals this gap and
hypothesizes (based on prior literature) that Gibrat’s law may not be valid in non-developed
countries. However, to the best of our knowledge, no existing paper has yet rejected or
accepted their hypothesis.

In this sense, this paper also contributes to the study of the relationship between firm
size and growth in emerging economies under the perspective of the Gibrat’s law, taking

1987b) and (5) the positive autocorrelation of growth implies that firms with rapid past growth tend to have
faster present growth (e.g. Wagner, 1992).

7
 simultaneously into account the multilevel cross-classified characteristics of industries and
countries.

3. Managerial Contributions

Growth, abnormal return and costs of capital are the three main value drivers (Serra
and Fávero, 2017). Kalpan and Norton (1992, 1993 and 1996) state that a firm must use a
wide variety of goals, including sales growth. As managers aim to maximize shareholders’
value, it seems very important to understand growth’s determinants. Such an understanding
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encompasses at least three managerial contributions: (a) managerial purposes, (b) company
valuation and (c) bonuses contracts.

In terms of managerial purposes, it helps identify the determinants that are under
managers’ control so that managers can measure, manage and communicate them. It also
directs managers in how they should influence police makers. In terms of company valuation,
if through the discounted cash flow methodology growth is an important assumption and if
through a relative methodology (multiples’ valuation) growth determinants can help identify
comparable companies: are companies in different countries (even from the same industry)
really comparable? In terms of bonus contracts, it will shed light on the following questions.
(i) To what extent are managers in control of sales growth? (ii) How similar is sales growth
between two different countries? (iii) What is the contribution of firm’s characteristics to sales
growth? The answers to these 3 questions will help design case-by-case sales growth targets
for variable remuneration.

In this sense, this paper contributes to the understanding of the behavior of the real
annual sales growth of firms, taking into account variations in industries and countries. If
industry effects are stronger (as in this study), managers should be more focused on the
relative characteristics of industries, respect the differences among industries and follow more
adequate multiples of companies that operate in the same industry. However, if the
differences among countries explain most of the variation of sales growth, a focus on
geographic strategies and countries’ particularities should result in a more fruitful approach.

8
 4. Methodology

4.1. Sample and the Cross-Classification of Industries and Countries

This study is comprised of 11,381 firms distributed in 17 industries from six Latin
American countries (Argentina, Colombia, Mexico, Peru, Chile and Brazil). Our data refer to
the 2012-2015 period. It is important to emphasize that our database is not a longitudinal
(panel) database since we have collected the last available data offered by the sources, which
varies from 2012 to 2015.

To develop the proposed model, the outcome variable refers to the real annual sales
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growth calculated as the compound annual growth rate for the analyzed period, following Lee
(2010) and Evans (1987a, 1987b). The explanatory variables can be defined for insertion at
each hierarchical level (firm, industry and country) as follows:

- GDP growth: continuous variable (country level) collected from the World Bank
(2016) database, refers to the gross domestic product growth rate for the analyzed period;

- Efficacy of corporate boards: continuous variable (country level) that varies from 1
to 7 and that is collected from the Executive Opinion Survey of the World Economic Forum
(2016) through the question, “In your country, how would you characterize corporate
governance by investors and boards of directors? [1 = management has little accountability to
investors and boards; 7 = management is highly accountability to investors and boards]”;

- Commodity producer: dummy variable (industry level) collected from the Enterprise
Surveys of the World Bank (2016) and indicates if the industry is a commodity producer; in
this study, commodity-producing industries are basic metals, food, non-metallic minerals and
rubber & plastics products;

- Exporter firm: dummy variable (firm level) collected from the Enterprise Surveys of
the World Bank (2016) and indicates if the firm has exportation activities.

- Size: dummy variable (firm level) collected from Enterprise Surveys of World Bank
(2016) that indicates if the firm has 100 employees or more.

Table 1 presents these definitions, the sources, and their summary statistics.

[INSERT TABLE 1 HERE]

9
 Figures 1 and 2 show the variation in the average real sales annual growth for the entire
period across countries and industries, respectively. They show that sales growth presents
high variance across industries and across countries.

[INSERT FIGURE 1 HERE]

[INSERT FIGURE 2 HERE]

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Table 2 shows the cross-classification nature of the sample. For example, we can
verify that 200 out of 717 firms that operate in Basic Metals are in Argentina, 190 are in
Chile, 164 are in Colombia, and 163 are in Peru. Conversely, (but now in columns), 200 out
of 1,573 Argentinean firms operate in Basic Metals. This table presents data that do not reflect
a balanced design in two dimensions, similar to in classical variance analysis. The sample
dimensions per cell vary considerably and many cells in the matrix are empty. Thus, classical
approaches to the analysis of two-way data cannot be easily applied. Furthermore, the use of
the cross-classified multilevel model is justified since the natural cross-classification of the
data between industries and countries is in the second level of the analysis.

[INSERT TABLE 2 HERE]

Even though it is possible to choose a higher-level unit as either the row or column
factor, we adopted the convention that the data are arranged so that the level with more units
becomes the row factor and the level with fewer units becomes the column factor.

Industry and country means are another important metric to compare the performance
between a single company and the global returns. Nonetheless, it’s important to verify the
existence of a certain level of heterogeneity among industries in different countries, including
what allows for better investment decisions and that the same characteristics of an industry’s
data may have different impacts on firm performance due to country effects.

10
 4.2. Multilevel Modeling

As stated in Courgeau (2007), multilevel models are a form of quantitative analysis of

social objects that is comprised of observations of the research object and the context and the
relationships that object has with different groups or environments (using individual level and
group level data). For example, in a study in a certain country, we can access the effects of the
individual level (companies) and the group level (for example regions or sectors) on an
outcome variable and verify if (or how) the individual or group level influences this research
construct.

In comparison with classical linear regression or covariance models, multilevel models

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offer the advantage of considering the data as hierarchically structured. These models propose
a structure of analysis in which the distinct levels where articulated data can be recognized,
which offers flexible strategies for modeling changes and their individual differences (Draper,
1995; Templin, 2015).

According to Raudenbush and Bryk (2002), through multilevel modeling, each level
of the data structure is formally represented by its own sub-model, which presents the
structural relationships and residual variability that occur at each specific level. Furthermore,
as stated in West et al. (2015), each of these sub-models expresses the relationship between
variables at a certain level and specifies how the variables at this level influence the
relationships established at other levels.

In addition, another important point of multilevel models compared to traditional

linear regressions is the latent variables and unobserved heterogeneity. Multilevel models
generally consider that unobserved heterogeneity is part of the structure of data, and the
grouping structure can capture latent variables that we cannot directly observe. According to
Gelman and Hill (2007), a potential drawback to multilevel modeling is the additional
complexity of coefficients that vary by group. Despite this complexity, the models become
more realistic and more appropriately absorb the logic of the market’s behavior.

Applications of traditional multilevel modeling in finance and economics has been

increasing over time (see, e.g.: Schmalensee, 1985; McGahan and Porter, 1997; Cardoso,
2000; Hawawini et al., 2004; Makino et al., 2004; Misangyi et al., 2006; Hough, 2006; Short
et al., 2006; Fávero et al., 2007; Short et al., 2007; Fávero, 2008; Fávero and Confortini,
2010; Kayo and Kimura, 2011; Vassolo, 2012; Alcalde et al., 2013; Serra and Martelanc,
2014; and Tashiro et al., 2015; Serra and Fávero, 2017).

11
 4.3. Cross-Classified Multilevel Models

Cross-classified multilevel analysis is less used than the traditional multilevel models;
in cross-classified multilevel analysis, sub-models for each level of analysis can be used to
test for the statistical significance of various cross-hierarchical interactions (Uyar and Brown,
2007; Fávero, 2011; Rabe-Hesketh and Skrondal, 2012). As such, these models can take
many forms depending on a number of factors, including (i) the number of hierarchies in the
data, (ii) what the researcher is interested in testing, (iii) whether the sub-models have
explanatory variables, and (iv) whether those sub-models account for random effects.
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Cross-classified multilevel modeling permits reaching the following goals in our

research (Raudenbush, 1993; Raudenbush and Bryk, 2002):

- estimate real annual sales growth’s (%) variance components between firms
(“within” industry-by-country cells), between industries and between countries;

- identify firm, industry and country characteristics associated with the real annual
sales growth of firms;

- estimate the residual variation components in real annual sales growth between
industries, between countries and “within” the cells after considering the characteristics of
firms, industries and countries;

- assess to what extent the associations between firm characteristics and their real
annual sales growth vary between industries, countries and cells;

- assess to what extent industry characteristics present effects that vary between
countries and if there are characteristics that vary between industries; and

- estimate the random effects related to industries and/or countries.

Figure 3 illustrates the hierarchical cross-classified two-level model adopted by us.

One level represents the internal firm effects on sales growth, and the other level represents
the combined effects of industry and country on sales growth.

[INSERT FIGURE 3 HERE]

The cross-classified multilevel regression has an advantage over the ordinary least
square (OLS) regressions since it enables us to estimate the industry-by-country effect on
12
 annual sales growth variance. This portion captures the aspects that are not shared with all
firms in the sample, except for a subset of firms within specific industry j in country k
(within-cell). As an illustration, this component would capture the effects on the variance due
to subsidies restricted to a country (for example, Brazil and Argentina’s price controls in the
oil and gas industry).

In the Appendix, we present the analytical descriptions of unconditional and

conditional cross-classified multilevel models.
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5. Findings

The empirical results for the unconditional model considering the restriction d0jk = 0
are presented in Table 3. The total variation in the real annual sales growth is decomposed
into three components: τb00 = 0.277 (intra-industry), τc00 = 0.024 (intra-country) and σ2 =
0.058 (firm “within” industry-by-country cell).

[INSERT TABLE 3 HERE]

According to equations (A.4), (A.5) and (A.6) presented in the Appendix, the three
mentioned correlations (intra-cell correlation, intra-industry correlation and intra-country
correlation, respectively) can be computed as follows:

0.277 + 0.024
ρbcd = = 0.838
0.277 + 0.024 + 0.058

0.277
ρb = = 0.772
0.277 + 0.024 + 0.058

0.024
ρc = = 0.067
0.277 + 0.024 + 0.058

These correlations indicate that, ceteris paribus, 77.2% of the total variation in the real
annual sales growth is estimated to be between industries and 6.7% is estimated to be between
countries. Therefore, it can be inferred from these that, ceteris paribus, 16.1% of the total
variation in real annual sales growth is associated with differences in firm features alone.

13
 To assess the influence of the level 1 predictive variables on the real annual sales
growth of firms, the level 1 equation estimated for the conditional model can be written as
follows:

rasgijk = π 0 jk + π1 jk (exp) ijk + π 2 jk (size)ijk + eijk (2)

The residual term now represents the within-cell variation in the real annual sales
growth of firms after controlling for exp and size level 1 explanatory variables included in
equation (2).

Cross-classified multilevel models allow for the assessment of the interrelationships

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among hierarchies through the level 2 equations. Still following the same procedure proposed
by Raudenbush et al. (2004), Uyar and Brown (2007) and Fávero (2011), we specified the
intercept term π0jk and the slope coefficients π1jk and π2jk from the level 1 equation (2) as
functions of the variables of industries and countries. The rest of the level 1 slope coefficients
are fixed. The final version of the level 2 model is as follows:

For the intercept:

π 0 jk = θ0 + β01( gdp)k + β02 (boards)k + γ 01(comm) j + b00 j + c00k (3)

For exp:

π1 jk = θ1 + γ11(comm) j (4)

For size:

π 2 jk = θ2 + γ 21(comm) j (5)

Inserting equations (3), (4) and (5) into equation (2) offers the full conditional model,
as follows:

rasgijk = θ0 + β 01 ( gdp )k + β02 ( boards )k + γ 01 ( comm ) j

+ θ1 + γ11 ( comm ) j  ( exp )ijk

 
(6)
+ θ2 + γ 21 ( comm ) j  ( size )ijk
 
+ b00 j + c00k + eijk

14
 6. Results

The empirical results of the proposed model are presented in Table 4.

[INSERT TABLE 4 HERE]

According to Table 4, the estimation of the within-cell variance in real annual sales
growth (σ2) has declined from 0.058 to 0.026. This indicates that the explanatory variables
 0.026 
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explain approximately 55%  1 −  of the differences in real annual sales growth in the
 0.058 
same industry and country after having accounted for the impact of the differences in firms.
Analogously, after accounting for the impact of the differences in firms’ and countries’
characteristics, the variable related to the industry (comm) explains approximately 43%
 0.159 
1 −  of the variation (estimated variance τb00) in the average real annual sales growth
 0.277 
across industries. Finally, country-level gdp and boards explain almost all of the differences
 0.0003  
in average real annual sales growth across countries 1 −  ≈ 99% after accounting
 0.024  
for the impact of firms’ and industries’ characteristics. These results corroborate the proposed
Hypotheses 1 and 2. Furthermore, we hypothesize that the reason for this is because firms
come from quite similar emerging Latin American economies, especially in terms of the
efficacy of corporate boards (Table 4). Despite this fact, we found a positive correlation
between the quality of the corporate boards (measured by the accountability to investors and
boards) and the outcome performance variable (following Dowen (1995), Lawal (2012) and
Johl et al. (2015)).

A possible explanation for the remaining variance (0.159) across industries can be
associated with the regulations in Latin American countries. Industry policies favoring
barriers for new entrants enable firms to operate inefficiently (Ovtchinnikov, 2010).
Additionally, the 2012-2015 period refers to a cycle of significant instability for some
industries that can be a source of variance that may not be entirely captured by comm.

Country factors have a small but significant remaining effect on firms’ sales growth
(0.0003). Despite the existence of the overlapping characteristics among Latin American

15
 countries (such as legal systems, the development of financial markets and wealth inequality),
the results show that countries’ characteristics can influence firms’ sales growth.

The variables included in levels 1 and 2 (the conditional model) significantly explain
part of the differences in the real annual sales growth across firms that operate in the same
industry and are from the same country and in different industries and from different
countries. The deviance declined by 65.526 [37.714 - (- 27.812)], which is statistically
significant with 7 (11 - 4) degrees of freedom, as sig. χ2 < 0.01.

The conditional model can be expressed as follows:

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rasgijk = 4.784 − 0.271(exp) ijk − 0.170( size)ijk

+ 0.477( gdp)k + 0.301(boards)k
− 0.988(comm) j − 0.008(comm) j (exp) ijk − 0.090(comm) j ( size)ijk (7)
+ eijk + b00 j + c00k

6.1. Level 1 Determinants

The level-1 variables exp and size are related to the firm. The first has a negative and
significant coefficient (θ1), indicating that, ceteris paribus, when the firm exports, its real
annual sales is expected to decrease in the period, which corroborates the previous discussion.
Since level-2 variables perform a moderating effect on the effect of level-1 variables over real
annual sales growth, the negative and significant slope parameter γ11 indicates that exporting
firms tend to have a more exacerbated negative impact on real annual sales if they operate in a
commodity industry. The explanations for the results are twofold. First, in the 2012-2015
period, two of the largest Latin American consumer markets (Brazil and Argentina) were
affected by internal economic and political crises, which reduced the purchases of products
from other Latin American countries. Second, during this period, China, USA and Europe
(the largest commodities consumer markets of Latin American products) were either in a
slower economic expansion or in an economic recovery process, which further affected Latin
American exports.

Firm size is negatively related to firm growth, which is consistent with Hall (1987),
Evans (1987a), Dunne et al. (1989), Variyam and Kraybill (1992), Dunne and Hughes (1994),
McPherson (1996), Almus and Nerlinger (2000), Goddard et al. (2002), Yasuda (2005),
Bottazzi and Secchi (2006), Calvo (2006) and Carvalho (2008). As with exp, we also

16
 interacted size with comm; the relationship became more negative if the firm operated in a
commodity producing industry (parameter γ21), which is consistent with Bodart et al. (2015).
To verify whether the differences across countries and industries affect the relationship
between firm size and growth, we included a random effect in the coefficient θ2, but the
variance was not significant. In this sense, our results reject Gibrat’s law: an average large
firm in Latin America grows slower than a smaller one. In addition, if this firm produces a
commodity, the growth is even slower.

6.2. Level 2 Determinants

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We find that boards, gdp (country-determinants) and comm (industry-determinant) are

significant to distinguish between firms’ mean real annual sales growth. Firms from countries
with higher GDP growth (%) and with more effective corporate boards, on average, tend to
have higher real growth of annual sales, which is consistent with Dowen (1995), Weir and
Laing (2001), Lawal (2012), Johl et al. (2015) and Santos et al. (2016).

The efficacy of corporate boards (measured as the accountability disclosure to

investors and boards) may capture the effect of the management and the corporate governance
qualities at a country-level. As stated in Johl et al. (2015) and Santos et al. (2016), in
emerging economies governance practices are more homogeneous. Furthermore, in many
cases, the selection of board members is not based on their expertise and experience but for
political reasons to legitimize business activities and contracts. As a consequence, governance
characteristics are often not used by market players and stakeholders to make their investment
decisions and evaluate future indicators, revenues and cash flows, as occurs in developed
countries.

Even so, we have found that board accounting and financial expertise are positively
correlated with firm performance. This finding shows that, even in similar emerging
economies, subtle differences in governance practices can increase firms’ performance. This
finding can provide some implications for future research on the effectiveness of corporate
boards on firm performance in emerging countries. In other words, by investigating corporate
boards, this study present new approaches for researchers and regulators on the importance of
corporate board’s characteristics and firm performance.

The positive effect of GDP growth on sales growth is an expected result. As in Kayo
and Kimura (2011), this variable may capture both the effect of the economic conditions and
17
 the aggregated capacity of a given country to provide institutional conditions for sustainable
growth at the firm-level. In this sense, if a country is experiencing an economic expansion
period, the same would be occurring to the firms that belong to this country.

In addition, firms that operate in commodity producing industries tend to have

negative real growth of annual sales. As we argue in subsection 6.1, these results are mainly
driven by the analysis period (2012-2015), when China and India reduced their domestic
consumption, which affected oil, basic metals, minerals and rubber prices. As the economies
of the countries that comprise our sample are mainly commodity exporters with low portfolio
diversification, the more related an industry was to the production and exportation of
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commodities in this period, the lower their the annual sales growth.

Bodart et al. (2015) analyzed the impacts of structural country characteristics in

commodity exporter markets and identified a strong impact between market development and
country factors as commodity diversification. The authors stated that firms from countries
with low diversification that relied more on exports were more susceptible to higher volatility
in their sales behaviors.

7. Conclusions and Implications

The use of multilevel models to understand the behavior of firms’ key performance
indicators (including sales growth) is still rare. Many studies use only one single regression
equation to verify the characteristics that most affect sales growth. According to Short et al.
(2006), applications using multilevel models offer researchers new possibilities to test more
complicated hypotheses without the risk of violating the assumptions inherent in other
techniques, such as the ordinary least squares regression. In contrast, multilevel modeling
properly addresses OLS’s assumptions that do not hold (independency of observations).

Multilevel modeling permits the assessment of the variance percentage at each

analysis level from spatial and geographic perspectives. Many articles have studied variance
decomposition without evaluating the impacts of the presence of certain variables and only
seeking to determine where most of the variability in the outcome variable occurs (Rumelt,
1991; Goldszmidt et al., 2007; Serra and Fávero, 2017).

Such modeling per se has its contributions. The estimation of the source of variability
would help managers with the direction in which they should focus their attention. If the

18
 industry effect is stronger (which is the case in this study), the impacts of the differences
among industries’ characteristics on the decomposition of the real annual sales growth should
receive greater attention. However, if the differences among firms explain the largest part of
the variance, the focus on the supply and management of intrinsic attributes and on the
differences among firms is stimulated.

Our null model identified that, ceteris paribus, (i) the largest proportion of variation is
due to differences between industries (77.2%), (ii) 16.1% of the variance was due to
differences in firm features, and (iii) 6.7% of the variance was estimated to be between
countries. Such findings have three main implications. (1) As the majority of the economic
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literature regarding firm growth focuses on firm-characteristics (most of which exclusively

tests size (Gibrat’s Law) and few explore other variables), our results indicate that, for Latin
American countries, researchers should consider adding industry-determinants into their
analysis (with implications for research). (2) In addition to that, as countries’ leaders seek
economic growth, our results indicate that policy makers may have an important role in
fomenting it through industry policies (with implications for practice and society). It is likely
that firms from the same industry will respond equally to fomenting policies. Ovtchinnikov
(2010) documented similar effects on performance and leverage of firms from deregulated
industries. In this sense, our findings can incentivize managers to dedicate part of their time to
influence policy makers to construct the right industry framework to foster greater sales
growth. (3) The fact that the majority of the variability in sales growth resides within
industries favors comparisons between firms from the same industry and country, whether for
bonus contracts or for relative valuations (with implications for practice). This result was
favored by the restricted characteristic of our sample (firms from Latin American countries).
Serra and Fávero (2017) reported lower comparability between multiples of firms from an
emerging country (Brazil) and a developed country (United States of America).

In our study, we have gone further and included predictive variables at the firm-,
industry- and country-levels. Our full conditional model indicates that firm size is negatively
related to firm growth, which contradicts Gilbrat’s law for Latin American countries but is in
line with several other papers. To the best of our knowledge, our result is the first documented
study for Latin America, and it confirms Nassar et al. (2014) hypothesis for non-developed
countries. Therefore, it is possible that the following explanations are also valid for Latin
America. Small firms (i) have to achieve a minimum efficient size (Audretsch et al., 2004),
(ii) can make faster decisions (Chen and Hambrick, 1995) and (iii) respond faster to business
19
 opportunities (Steffens et al., 2009; Darnall et al., 2010; Leischnig et al., 2016). Another firm-
level determinant of sales growth is whether the firm is an exporter, which also has a
significantly negative relationship. This negative relationship (alone or in interaction with
firm-level determinants) can be due to the particularities of the 2012-2015 analyzed period.
These two variables, ceteris paribus, explained 55% of the differences in the annual sales
growth of firms in the same industry and country.

The industry-level determinant comm (which indicates whether the industry is a

commodity producer), ceteris paribus, was negatively related to sales growth and explained
43% of the variation in average real annual sales growth across industries. The remaining
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variation (57%) can be due to regulation (among other explanations), which reinforces the
role of policy makers in firms’ growth.

The country-level represents the least important proportion of variation. This finding
shows that Latin American countries share quite similar business environments. The absence
of relevant variability at the country level may be because all the firms operate in Latin
America. Therefore, firm’s performance may be affected more homogeneously due to the
country’s characteristics, such as the rate of commodity production, the tax burden, the
interest rate or the availability of credit. This remark is reinforced by the fact that the variables
we used in the full conditional model (GDP growth and the Efficacy of the Corporate Board,
which measures to what extent management is accountable to investors and boards of
directors) almost fully, ceteris paribus, explained the differences in average real annual sales
growth across countries after accounting for the impact of firms’ and industries’
characteristics.

Other studies can use different approaches with respect to the financial market. The
inclusion of new predictive variables at levels 1 and 2 and even the investigation of other
countries’ differences (in a cross-sectional or in a time series perspective) can be used to
determine new strategies and create different models. These new strategies would provide us
with a deeper understanding of the mechanisms that rule sales growth and firm performance.
According to Serra and Fávero (2017), beyond industry or country classifications, other
stratifications can be defined to group firms in clusters by the similarity of their economic
fundamentals, when appropriate. In this case, part of the variation in the outcome variable can
shift from the variability within firms from the same industry and the variability among
countries to the variability among clusters.

20
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Appendix

Unconditional Model

In cross-classified multilevel models, the estimation of variance components between

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industries, between countries and “within” the cells of Table 2 is elaborated through the
unconditional model, which does not consider the inclusion of predictive variables in any
level of analysis (Raudenbush and Bryk 2002).

Level 1 (“Within Cell” Model): One single vector of firms is nested “within” each
cross-classified cell. Therefore, this model describes the variance between firms. Hence:

rasgijk = π0 jk + eijk , eijk ~ N(0, σ2) (A.1)

where:

- rasgijk is the real annual sales growth of firm i that operates in industry j and is from
country k;

- π0jk is the mean real annual sales growth of firms in cell jk (that is, firms operating in
industry j from country k); and

- eijk is the random “firm effect” (that is, the real annual sales growth deviation of firm
ijk from the cell mean). It is assumed that these deviations are normally distributed with 0
mean and σ2 “within-cell” variance.

The subscribed letters i, j and k respectively represent the firms, industries and
countries. Therefore:

- i = 1, ..., njk firms in cell jk;

- j = 1, ..., J = 17 industries;

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 - k = 1, ..., K = 6 countries.

Level 2 (“Between Cell” Model): The variation between cells is attributed to the
effects of industries, countries and possibly industry-by-country interaction effects. Thus:

π 0 jk = θ 0 + b00 j + c 00 k + d 0 jk , (A.2)

b00j ~ N(0, τb00),

c00k ~ N(0, τc00),

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d0jk ~ N(0, τd00),

where:

- θ0 is the general mean of real annual sales growth for all firms;

- b00j is the main random effect of industry j (that is, the contribution of industry j to all
countries (it is assumed to be normally distributed with 0 mean and τb00 variance));

- c00k is the main random effect of country k (that is, the contribution of country k to all
industries (it is assumed to be normally distributed with 0 mean and τc00 variance)); and

- d0jk is the random effect of the interaction (that is, the cell mean’s deviation from the
predictions of the general mean and the two main effects (it is assumed to be normally
distributed with 0 mean and τd00 variance)).

According to Raudenbush and Bryk (2002) and Fávero (2011), it is given that the
unconditional mixed model is defined by replacing (A.2) in (A.1). Therefore:

rasgijk = θ0 + b00 j + c00k + d0 jk + eijk (A.3)

known as a two-way analysis of variance model with random effects in line b00j,
random effects in column c00k, a two-way interaction d0jk and deviations “within” cell eijk.

The two-level models described by equations (A.1) and (A.2) decompose the variance
of real annual sales growth into within-cell (σ2) and between-cell components. The latter is
then decomposed in three new components: intra-industry variance (τb00), intra-country
variance (τc00) and residual between-cell variance (that is, the variances between cells that are
not considered by the variances of lines and columns) (τd00). This allows for the elaboration of
three intra-class correlation coefficients, which are as follows.
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 τ b 00 + τ c 00 + τ d 00
corr(Yijk ,Yi'jk ) = ρbcd = (A.4)
τ b 00 + τ c 00 + τ d 00 + σ 2

which measures the correlation between real annual sales growth of firms that operate
in the same industry and country (intracell correlation).

τ b 00
corr(Yijk ,Yi'jk ' ) = ρb = (A.5)
τ b 00 + τ c 00 + τ d 00 + σ 2

which measures the correlation between real annual sales growth of firms that operate
in the same industry (intra-industry correlation) but are from different countries.
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τ c 00
corr(Yijk ,Yi'j 'k ) = ρc = (A.6)
τ b 00 + τ c 00 + τ d 00 + σ 2

which measures the correlation between the real annual sales growth of firms from the
same country (intra-country correlation) that operate in different industries.

Conditional Model

Since the fully unconditional model specifies the variability associated with firms,
industries and countries, part of this variability can be presumably due to the predictive
variables related with the firms’, industries’ and countries’ characteristics and their relevant
interactions.

Thus, the general random cross-classified model consists of two sub-models: level 1
(or within-cell) and level 2 (or between-cell) models. The cells refer to the cross-
classifications by the two higher-level units. Formally, there are i = 1, 2, …, njk level 1 firms
nested within cells cross-classified by j = 1, 2, …, J first level 2 industries (designated as
rows) and k = 1, 2, …, K second level 2 countries (designated as columns). The inclusion of
predictive variables into equation (A.1) changes the meaning of the residual term.

The level 1 (or within-cell) model represents the real annual sales growth for firm i in
individual cells cross-classified by level 2 units j and k. It can be written as follows:

rasgijk = π 0 jk + π1 jk a1ijk + π 2 jk a2ijk + ... + π Pjk aPijk + eijk

P
rasgijk = π 0 jk + ∑ π pjk a pijk + eijk (A.7)
p =1

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 where:

- πpjk (p = 1, 2, ..., P) are the level 1 coefficients.

- apijk is the level 1 predictor p for firm i in cell jk.

- eijk is the level 1 or within-cell random effect.

- σ2 is the variance of eijk (that is the level 1 or within-cell variance), and it is assumed
that the random term eijk ~ N(0, σ2).

According to Raudenbush et al. (2004) and Fávero and Belfiore (2017), each of the
πpjk coefficients in the level 1 (or within-cell) model becomes an outcome variable in the level
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2 or between-cell model as follows:

π pjk = θ p + ( β p1 + b p1 j ) X 1k + ( β p 2 + b p 2 j ) X 2 k + ... + ( β pQ + b pQ j ) X Q k +
p p p

(γ p1 + c p1k )W1 j + (γ p 2 + c p 2 k )W2 j + ... + (γ pR p + c pR p k )W R p j +

(A.8)
δ p1 jk Z 1 jk + δ p 2 jk Z 2 jk ... + δ pS jk Z S
p p jk +
b p 0 j + c p 0 k + d p 0 jk

Qp Rp Sp

π pjk = θ p + ∑ ( β pq + b pqj ) X qk + ∑ (γ pr + c prk )Wrj + ∑ δ psjk Z sjk + b p 0 j + c p 0 k + d p 0 jk

q =1 r =1 s =1

where:

- θp is the model intercept, which is the expected value of πpjk when all explanatory
variables are set to 0).

- βpq are the fixed effects of column-specific predictors Xqk, q = 1, 2, …, Qp.

- bpqj are the random effects associated with column-specific predictors Xqk and vary
randomly over rows j = 1, 2, …, J.

- γpr are the fixed effects of row-specific predictors Wrj, r = 1, 2, ..., Rp.

- cprk are the random effects associated with row-specific predictors Wrj.

- δpsjk are the fixed effects of cell-specific predictors Zsjk, which are the interaction
terms created as the products of Xqk and Wrj, s = 1, 2, …, Sp and Sp ≤ Rp x Qp.

- bp0j, cp0k, dp0jk are residual row, column, and cell-specific random effects,
respectively, on πpjk after taking into account Xqk, Wrj, and Zsjk. It is assumed that bp0j ~ N(0,
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 τpb00), cp0k ~ N(0, τpc00) and that the effects are independent of each other (Raudenbush and
Bryk, 2002).

To facilitate the presentation of the combined conditional model, it is first assumed

that there is only one industry variable (Wj), one single country variable (Xk) and one
interaction variable (Zjk = Wj*Xk). Hence, according to Uyar and Brown (2007), by replacing
(A.8) in (A.7) for p = 0 and 1, we are given the following combined conditional model:
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rasgijk = θ 0 + β0 X k + b01 j X k + γ 0W j + c01kW j + δ 0 ( Z jk ) +

θ1aijk + β1 ( X k * aijk ) + b11 j ( X k * aijk ) + γ 1 (W j * aijk ) + c11k (W j * aijk ) + δ1( Z jk * aijk ) +
b10 j aijk + c10k aijk + d1 jk aijk + b00 j + c00k + d 0 jk + eijk

(A.9)

It is observed that equation (A.9) presents two levels and serves to illustrate the level-
by-level specification of the conditional model in the cross-classified multilevel model.
Hence, each firm is assessed in two lines (industries and countries) and, in this case, by
estimating the coefficients of four predictors, including Zjk. Following Uyar and Brown
(2007) and Fávero (2011), the total number of coefficients and residuals that need to be
estimated in equation (A.9) is 19 and, as more predictors are added at both levels, the equation
becomes increasingly more complex and the number of coefficients and residuals to be
estimated increase drastically. One way to consider this fact is to determine which predictors
at each level are most likely to have fixed effects rather than random, and this consideration
must be taken into account when the conditional model is estimated. Other way is to set the
random industry-by-country interaction effects (d0jk) equal to 0.

According to Raudenbush et al. (2004), in the cross-classified multilevel model three

types of parameter estimates are elaborated: empirical Bayes estimates of randomly varying
effects of level 1, or within cell, and row and column-specific coefficients; maximum-
likelihood estimates of level 2 or row, column and cell-specific coefficients; and maximum
likelihood estimates of the level 1, or within-cell, and level 2, or between-cell, variance-
covariance components. The estimation procedure uses a full maximum likelihood approach.

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 Table 5 summarizes the sources of variation for a level 1 coefficient πpjk, as specified
in equations (A.7) and (A.8).

[INSERT TABLE 5 HERE]

As seen in Table 5, there are three fundamental sources of variation: variation among
industries, variation among countries, and industry-by-country variation. Variation among
industries is partitioned into a component that is explained by the industry-level fixed effects
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(B) and another component left unexplained (C). Variation among countries is similarly
partitioned into a component explained by fixed effects (D) and a component that is
unexplained (E). Each of the industry components interacts with each of the country
components to form sources of industry-by-country variation: a component that is explained
by the fixed effects [(B) x (D)], a component that accounts for the fact that the effect of the
industry-level influence varies randomly over countries [(B x (E)], a component that accounts
for the fact that the effect of the country-level influence varies randomly over industries [(D)
x (C)], and a residual between-cell component unrelated to the influence [(C) x (E)]
(Raudenbush and Bryk 2002).

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