Market structure, productivity and scale in European business services
AbstractUsing data from 11 EU countries, the paper investigates the impact of scale economies on labour productivity in European business services. Moreover, it analyses whether the incidence of scale sub-optimality is related to characteristics of the market or to national regulation characteristics. The econometric analysis is based on a production function model in combination with a distance-to-the-frontier model. We find evidence for the existence of increasing returns to scale in business services firms. A result is that throughout the EU, business-services firms with less than 20 employed persons have a significantly lower level of labour productivity than the rest of the business-services industry. Two factors explain the scale inefficiencies. The first is the level of policy-caused firm-entry costs; higher start-up costs for new firms go along with more scale inefficiency. Secondly, business-services markets tend to be segmented by firm size: firms tend to compete predominantly with firms in their own size segment of the markets. Scale-related inefficiencies are to some extent compensated by more competition within a firm's own size segment. If a firm operates in a more “crowded” segment this has a significant and positive impact on its labour productivity. We derive some policy implications from our findings.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6137.
Date of creation: Nov 2007
Date of revision:
EU; business services; scale efficiency; labour productivity; regulation; entry costs;
Find related papers by JEL classification:
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D2 - Microeconomics - - Production and Organizations
- L8 - Industrial Organization - - Industry Studies: Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-15 (All new papers)
- NEP-EEC-2007-12-15 (European Economics)
- NEP-EFF-2007-12-15 (Efficiency & Productivity)
- NEP-MIC-2007-12-15 (Microeconomics)
- NEP-REG-2007-12-15 (Regulation)
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