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Competitive, but too small - productivity and entry-exit determinants in European business services

Author

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  • Kox, Henk L.M.
  • Leeuwen, George van
  • Wiel, Henry van der
Abstract
The paper investigates whether scale effects, market structure, and regulation determine the poor productivity performance of the European business services industry. We apply parametric and nonparametric methods to estimate the productivity frontier and subsequently explain the distance of firms to the productivity frontier by market characteristics, entry- and exit dynamics and national regulation. The frontier is assessed using detailed industry data panel for 13 EU countries. Our estimates suggest that most scale advantages are exhausted after reaching a size of 20 employees. This scale inefficiency is persistent over time and points to weak competitive selection. Market and regulation characteristics explain the persistence of X-inefficiency (sub-optimal productivity relative to the industry frontier). More entry and exit are favourable for productivity performance, while higher market concentration works out negatively. Regulatory differences also appear to explain part of the business services' productivity performance. In particular regulation-caused exit and labour reallocation costs have significant and large negative impacts on the process of competitive selection and hence on productivity performance. Overall we find that the most efficient scale in business services is close to 20 employees and that scale inefficiencies show a hump-shape pattern with strong potential scale economies for the smallest firms and diseconomies of scale for the largest firms. The smallest firms operate under competitive conditions, but they are too small to be efficient. And since this conclusion holds for about 95 out of every 100 European business services firms, this factor weighs heavily for the overall productivity performance of this industry.

Suggested Citation

  • Kox, Henk L.M. & Leeuwen, George van & Wiel, Henry van der, 2010. "Competitive, but too small - productivity and entry-exit determinants in European business services," MPRA Paper 24389, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24389
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    References listed on IDEAS

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    Cited by:

    1. Brouwer, E. & van der Wiel, H.P., 2010. "Competition and Innovation : Pushing Productivity Up or Down?," Discussion Paper 2010-52, Tilburg University, Center for Economic Research.
    2. Enrico Saltari, 2012. "The role of ICT and Business Services in Italy," Working Papers in Public Economics 152, Department of Economics and Law, Sapienza University of Roma.
    3. Brouwer, E. & van der Wiel, H.P., 2010. "Competition and Innovation : Pushing Productivity Up or Down?," Other publications TiSEM 9efe62df-d940-4471-8bc7-e, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    productivity; frontier models; scale; industry dynamics; regulation; European Union; business services;
    All these keywords.

    JEL classification:

    • L8 - Industrial Organization - - Industry Studies: Services
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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