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Sub-Optimal Scale Firms and Compensating Factor Differentials in Dutch Manufacturing

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  • Audretsch, David B
  • Thurik, A R Roy
  • Van Leeuwen, Geroge

Abstract

The purpose of this paper is to shed some light on why so many smaller-scale firms which have traditionally been classified as sub-optimal scale firms can exist. We suggest that by pursuing a strategy of compensating factor differentials, that is by remunerating and deploying factors of production differently to their larger counterparts, small enterprises are able to compensate for size-inherent cost disadvantages. Based on a sample of over 7000 Dutch manufacturing firms, we find considerable evidence that such a strategy of compensating factor differentials is pursued within a European context. When viewed through a static lens, the existence of such a strategy, while making small and sub-optimal scale enterprises viable, suggests that they impose a net welfare loss on the economy. When viewed through a dynamic lens, however, the findings of a positive relationship between firm age and employee compensation as well as firm age and firm productivity suggest that there may be at least a tendency for the inefficient firm of today to become the efficient firm of tomorrow.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1162.

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Date of creation: Apr 1995
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Handle: RePEc:cpr:ceprdp:1162

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Keywords: Firm Size; Productivity; Wages;

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Cited by:
  1. David Audretsch & Roy Thurik, 0000. "Sources of Growth," Tinbergen Institute Discussion Papers 97-109/3, Tinbergen Institute.

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