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Small firms captive in a box like lobsters

Author

Listed:
  • Henk Kox

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • George van Leeuwen

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Henry van der Wiel

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

The 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.

Suggested Citation

  • Henk Kox & George van Leeuwen & Henry van der Wiel, 2010. "Small firms captive in a box like lobsters," CPB Discussion Paper 158, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:discus:158
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    File URL: http://www.cpb.nl/sites/default/files/publicaties/download/disc158.pdf
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    References listed on IDEAS

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    1. Renaud Bourlès & Gilbert Cette & Jimmy Lopez & Jacques Mairesse & Giuseppe Nicoletti, 2013. "Do Product Market Regulations In Upstream Sectors Curb Productivity Growth? Panel Data Evidence For OECD Countries," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1750-1768, December.
    2. Brown, Clair & Haltiwanger, John & Lane, Julia, 2006. "Economic Turbulence," University of Chicago Press Economics Books, University of Chicago Press, edition 0, number 9780226076324, April.
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    Cited by:

    1. Henk Kox & George van Leeuwen, 2012. "Dynamic market selection in EU business services," CPB Discussion Paper 210, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Kox, Henk L.M. & Leeuwen, George van, 2011. "Measuring dynamic market selection by persistent scale inefficiencies - new methodology applied to EU business services," MPRA Paper 34986, University Library of Munich, Germany.

    More about this item

    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

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