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

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

Small firms captive in a box like lobsters

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.

ICT, Innovation and Business Performance in Services: Evidence for Germany and the Netherlands

Using panel data for German and Dutch firms from the services sector, this paper analyses the importance of ICT capital deepening and innovation for productivity. We employ a model that takes into account that innovation and ICT use may be complementary. The results show that the contribution of ICT capital deepening is raised when firms combine ICT use and technological innovations on a more permanent basis. Moreover, the joint impact of ICT use and permanent technological innovation on productivity appears to be of the same order of magnitude in the two countries. However, the direct impacts of innovation on multi-factor productivity seems to be more robust for Germany than for the Netherlands. --Productivity,Information and Communication Technologies,Innovation,Services,Panel Data

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

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

Market structure, productivity and scale in European business services

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.EU, business services, scale efficiency, labour productivity, regulation, entry costs

Adoption of advanced manufacturing technology and firm performance in the Netherlands

This paper presents characteristics of firms which employ advanced manufacturing tech-nology (AMT), explores the pattern of adoption of such technology, and traces the effects ofadoption on the evolution of employment and productivity. The study uses linked firm-leveldata on production, factor inputs and on advanced manufacturing technology. It is foundthat the percentage of firms which employ advanced technology increases with higher laborproductivity, higher export-sales ratios, and especially larger firm size. Corrected for interac-tions, however, only initial size and the capital-labor ratio in 1985 aid in predicting adoptionof AMT. Conditional on adoption of AMT it is seen that intensity of advanced technologyinputs decrease with firm size and with labor productivity. Finally, firms which employedAMT in 1992 show higher average growth rates of employment and of the capital-labor ratiobetween 1985 and 1991

Productivity effects of innovation modes

Many empirical studies have confirmed the positive impact of innovation on productivity at the firm level. The focus tends to be either on R&D driven techno-logical innovation on the one hand, or on organisational changes complemented by ICT on the other. To investigate the effect of different types of innovations on produc-tivity, we propose a model with two innovation input equations (R&D and ICT) that feed into a knowledge production function consisting of a system of three innovation output equations (product innovation, process innovation and organisational innova-tion), which ultimately feeds into a productivity equation. We find that ICT is an im-portant driver of innovation in both manufacturing and services. Doing more R&D has a positive effect on product innovation in manufacturing. Organisational innova-tion has the strongest productivity effects. We only find positive effects of product and process innovation when combined with an organisational innovation.technological innovation; non-technological innovation; ICT; R&D; productivity; trivariate probit; CDM model;

Product, Process and Organizational Innovation: Drivers, Complementarity and Productivity Effects

We propose a model where both R&D and ICT investment feed into a system of three innovation output equations (product, process and organizational innovation), which ultimately feeds into a productivity equation. We find that ICT investment and usage are important drivers of innovation in both manufacturing and services. Doing more R&D has a positive effect on product innovation in manufacturing. The strongest productivity effects are derived from organizational innovation. We find positive effects of product and process innovation when combined with an organizational innovation. There is evidence that organizational innovation is complementary to process innovation. Nous estimons un modèle dans lequel la recherche-développement (R-D) et l’investissement en technologies de l’information et de la communication (tic) déterminent trois types d’innovation (de produit, de procédé, et organisationnelle), lesquels influencent à leur tour la productivité. Nous trouvons que l’investissement en tic facilite l’innovation tant dans le secteur manufacturier que dans celui des services. Faire de la R-D a un effet positif sur l’innovation en produit dans le secteur manufacturier. L’effet le plus important sur la productivité provient de l’innovation organisationnelle. Les deux autres types d’innovation n’augmentent la productivité que s’ils sont accompagnés d’innovation organisationnelle. Cette dernière est complémentaire à l’innovation de procédé.Innovation, ICT, R&D, productivity , Innovation, ICT, R&D, productivité

Product, Process and Organizational Innovation: Drivers, Complementarity and Productivity Effects

We propose a model where both R&D and ICT investment feed into a system of three innovation output equations (product, process and organizational innovation), which ultimately feeds into a productivity equation. We find that ICT investment and usage are important drivers of innovation in both manufacturing and services. Doing more R&D has a positive effect on product innovation in manufacturing. The strongest productivity effects are derived from organizational innovation. We find positive effects of product and process innovation when combined with an organizational innovation. There is evidence that organizational innovation is complementary to process innovation.Innovation; ICT; R&D; Productivity