Small firms captive in a box like lobsters
AbstractThe paper empirically investigates whether a lack of competition determines the poor productivity performance of the European business services. It uses detailed panel data for 13 EU countries over the period 2000-2005. We apply parametric and nonparametric methods to estimate the productivity frontier and subsequently explain the distance to the productivity frontier by market characteristics, entry and exit dynamics and national regulation. We find that the most efficient scale in business services is close to 20 employees. Scale inefficiencies show a hump-shape pattern with strong potential scale economies for the smallest firms. Nonetheless, some 95% of the firms operate at a scale below the minimal optimal scale. While they are competitive in the sense that their productivities are very similar, they have strong scale diseconomies compared to the larger firms. Their scale inefficiency is persistent over time, which points to growth obstacles that hamper the achievement of scale economies. Regulation characteristics explain this inefficiency; in particular, regulation-caused exit and labour reallocation costs are found to have a large negative impact on productivity performance.
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Bibliographic InfoPaper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 158.
Date of creation: Sep 2010
Date of revision:
Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L5 - Industrial Organization - - Regulation and Industrial Policy
- D2 - Microeconomics - - Production and Organizations
- L8 - Industrial Organization - - Industry Studies: Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-09 (All new papers)
- NEP-BEC-2010-10-09 (Business Economics)
- NEP-EFF-2010-10-09 (Efficiency & Productivity)
- NEP-EUR-2010-10-09 (Microeconomic European Issues)
- NEP-REG-2010-10-09 (Regulation)
- NEP-SBM-2010-10-09 (Small Business Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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