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

Author

Listed:
  • 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.

Suggested Citation

  • Audretsch, David B & Thurik, A R Roy & Van Leeuwen, Geroge, 1995. "Sub-Optimal Scale Firms and Compensating Factor Differentials in Dutch Manufacturing," CEPR Discussion Papers 1162, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1162
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    More about this item

    Keywords

    Firm Size; Productivity; Wages;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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