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Market structure, productivity and scale in European business services

Author

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  • Kox, Henk L.M.
  • Leeuwen, George van
  • Wiel, Henry van der

Abstract

Using 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.

Suggested Citation

  • Kox, Henk L.M. & Leeuwen, George van & Wiel, Henry van der, 2007. "Market structure, productivity and scale in European business services," MPRA Paper 6137, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:6137
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    File URL: https://mpra.ub.uni-muenchen.de/6137/1/MPRA_paper_6137.pdf
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    References listed on IDEAS

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    2. Giuseppe Nicoletti & Stefano Scarpetta & Olivier Boylaud, 2000. "Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation," OECD Economics Department Working Papers 226, OECD Publishing.
    3. Schiantarelli, Fabio, 2005. "Product Market Regulation and Macroeconomic Performance: A Review of Cross Country Evidence," IZA Discussion Papers 1791, Institute for the Study of Labor (IZA).
    4. Henk Kox, 2002. "Growth challenges for the Dutch business services industry; international comparison and policy issues," CPB Special Publication 40, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Kim, H Youn, 1992. "The Translog Production Function and Variable Returns to Scale," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 546-552, August.
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    9. Kumbhakar, Subal C & Ghosh, Soumendra & McGuckin, J Thomas, 1991. "A Generalized Production Frontier Approach for Estimating Determinants of Inefficiency in U.S. Dairy Farms," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 279-286, July.
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    Cited by:

    1. Polder, Michael & Leeuwen, George van & Mohnen, Pierre & Raymond, Wladimir, 2010. "Product, process and organizational innovation: drivers, complementarity and productivity effects," MERIT Working Papers 035, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    2. Kox, Henk L.M. & Lejour, Arjan, 2006. "Dynamic effects of European services liberalisation: more to be gained," MPRA Paper 3751, University Library of Munich, Germany.
    3. Polder, Michael & Leeuwen, George van & Mohnen, Pierre & Raymond, Wladimir, 2009. "Productivity effects of innovation modes," MPRA Paper 18893, University Library of Munich, Germany.
    4. Stefan Mann & Klaus Mittenzwei & Franziska Hasselmann, 2013. "The importance of succession on business growth: A case study of family farms in Switzerland and Norway," Journal of Socio-Economics in Agriculture (Until 2015: Yearbook of Socioeconomics in Agriculture), Swiss Society for Agricultural Economics and Rural Sociology, vol. 6(1), pages 109-137.

    More about this item

    Keywords

    EU; business services; scale efficiency; labour productivity; regulation; entry costs;

    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

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