Private Provision of Highways: Economic Issues

This paper reviews issues raised by the use of private firms to finance, build, and/or operate highways — issues including cost of capital, level and structure of tolls, and adaptability to unforeseen changes. The public sector’s apparent advantage in cost of capital is at least partly illusory due to differences in tax liability and to constraints on the supply of public capital. The evidence for lower costs of construction or operation by private firms is slim. Private firms are likely to promote more efficient pricing. Effective private road provision depends on well-structured franchise agreements that allow pricing flexibility, restrain market power, enforce a sound debt structure, promote transparency, and foster other social goals.Privatization; Road finance; Toll road; Road pricing

Small firms, borrowing constraints, and reputation

This paper presents a simple model relating firm age with firm size and access to credit markets. Lending to new firms is risky because lenders have had no time to accumulate observations about them. As a result, interest rates are high and loans are small for entering firms. As firms need credit to operate, credit markets impose a limit on the scale of operation of new firms. Reputation building by the firms allows markets to overcome these difficulties over time. Large firms face lower interest rates than small firms, and credit markets fluctuations are shown to have different effects on firms of different size

LIQUIDITY CONSTRAINTS AND SMALL FIRMS' GROWTH

There is general agreement on the difference, in terms of efficiency, between small firms in southern and northern Italy (see Prosperetti and Varetto, 1991; Giannola and Sarno, 1996; Giannola, Papagni and Sarno, 1998; Sarno, 1999). As far as technical efficiency is concerned (that is the ability to generate output from a given amount of factors of production) there appears, over the years, a persistent, huge differential (around 30 per cent) in favour of Northern firms. These findings (Giannola and Sarno, 1996; Giannola, Sarno and Papagni, 1998) show that Southern firms are not in a position to exploit economies of scale as northern firms do. The fact that firms’ size in the Mezzogiorno, for different size classes, is systematically smaller than in the rest of Italy, is a particular feature that seems to have major consequences. When the analysis shifts from technical to economic efficiency (i.e., the ability to combine the factors of production so as to equalize the weighted marginal productivity of factors), the gap between southern and northern firms in the level of production costs is dramatically reduced (ranging from 6 to 10 per cent). These results suggest that the North-South gap is not so much related to a specific inefficiency, but to the smaller size of southern firms that does not allow them to profit from returns to scale to the same extent. A possible conclusion (with relevant policy implications) is that the root of many problems of southern firms lies in the obstacles that prevent them from growing to reach an adequate operating size. A related implication is that the southern industrial structure, due to its size characteristics, is more easily affected by monetary policy and the economic cycle (Gertler and Gilchrist, 1991; 1993) The difficulties faced by southern firms become evident if we look at the evolution of the Italian manufacturing industry during the 1990s. For this purpose, we can proceed by considering a sample of firms which is representative of the entire population from a sectoral, dimensional and geographical standpoint. During the 1990s there was an overall decline in average firm size in Italian across all size classes. This is particularly marked for southern firms, in which firms’ size in 1990 was already significantly below average; by 1994 this character was considerably accentuated and was confirmed in 1997; by contrast, average northern Italian firm size showed a major increase in 1997. Moreover, the less pronounced and less persistent decline of the average size did not prevent Northern firms from expanding sales in the period in hand; this is due to the rapid growth of exports that followed the 1992 devaluation of the Italian lira. In the same period, in the Mezzogiorno, sales of local firms show a persistent and significant decline. As a consequence, the dynamics of the productivity of labour was negative (or stagnant) in the South, while it steadily grew in the rest of the country. Southern firms, while experiencing at the end of the period some significant progress in penetrating foreign markets, faced increased competition on the domestic market due to the contraction in aggregate demand, severely affected by the restrictive stance of the macroeconomic policy. All in all, these data illustrate the weakness (if not the worsening) of the competitive position of manufacturing firms in the South

Compulsory Licensing of Technology and the Essential Facilities Doctrine

We consider compulsory licensing of intellectual property as a remedy for anticompetitive practices. We identify aspects of intellectual property that could warrant a different remedy from those developed for access to physical essential facilities. Based on the analysis, we present a characterisation of optimal compulsory licensing for a simple market. We find that royalty payments offer a greater range of choices to a regulator than fixed fees. Thus, even though the marginal cost of supplying access to intellectual property is zero, some unit charging is likely to be efficient.essential facilities, intellectual property, access price, royalty, investment

Why leadership matters for micro and small firms in the East Midlands?

This report was produced with data and assistance from East Midlands Chamber of Commerce and is being made available to business organisations in the East Midlands.This report highlights the importance of micro- and small firms in the East Midlands economy and the role of leadership in their development. It explores the adverse and rapidly changing conditions, and explains why business leadership, resilience and competitiveness are vitally important in addressing them. The strengths and vulnerabilities of the micro and small firm sectors in the East Midlands economy are summarised, including concerns over productivity levels and their effects on smaller firm competitiveness. Local Enterprise Partnership strategies for productivity improvement in Nottinghamshire, Derbyshire and Leicestershire are summarised. It highlights the lack of a single voice for business leadership in the region, and introduces the 'Leading for Growth' pilot programme led by the Small Business Charter with three regional universities

Bank relationships and small firms’ financial performance

We examine the relationship between the number of bank relationships and firms’ performance, evaluating possible differential effects related to firms’ size. Our sample of firms from Italy includes many small firms, 99 percent of which are not listed and for which bank debt is a major source of financing. In the sample, 4 percent of the firms have a single bank relationship, and 66 percent of them have five or fewer relationships. We find that return on equity and return on assets decrease as the number of bank relationships increases, with a stronger relationship for small firms than for large firms. We also find that interest expense over assets increases as the number of relationships increases. Particularly for small firms, our results are consistent with analyses indicating that fewer bank relationships reduce information asymmetries and agency problems, which outweigh negative effects connected to holdup problems.

Why small businesses were hit harder by the recent recession

Although both large and small businesses felt the sting of job losses during the 2007-09 downturn, small firms experienced disproportionate declines. A study of the recession’s employment effect on small firms suggests that poor sales and economic uncertainty were the main reasons for their weak performance and sluggish recovery—problems that affected large firms too, but to a lesser degree. Although a tightened credit supply constrained some small firms, weak consumer demand for the firms’ products and services was a more pressing factor, reducing revenues and dampening new investment spending.Recessions ; Small business ; Uncertainty ; Supply and demand ; Employment ; Credit

Small Firms, Employment, and Federal Policy

[Excerpt] It is widely believed that small firms promote job growth. In fact, small firms both create and eliminate far more jobs than large firms do. On balance, they account for a disproportionate share of net job growth—however, that greater net growth is driven primarily by the creation of new small firms, frequently referred to as start-ups, rather than by the expansion of mature small firms. The greater net job-creation rates associated with new small firms could motivate lawmakers to consider supporting such firms through various policy initiatives. However, policies specifically favoring small firms have both advantages and disadvantages. For instance, policies designed to prevent discrimination or reduce pollution would probably have smaller adverse effects on employment if they exempted small firms in those cases where compliance was particularly costly for small firms. Conversely, some policies CBO has examined that would increase employment, such as reducing payroll taxes for firms that hire additional workers, would be less cost-effective if they were restricted to small firms. Under current federal laws and regulations, small firms already receive more favorable treatment than large firms do in many areas. For example, certain provisions of the tax code relating to capital gains and the expensing of capital investments favor small firms. The Small Business Administration (SBA) helps small firms obtain loans. And many regulatory policies, such as those prescribed by the Family and Medical Leave Act of 1993, include exemptions for small firms. Because further efforts to favor small firms may shift employment away from large firms in an inefficient manner, broadly targeted policies may spur total employment more effectively