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

David Audretsch (), Roy Thurik and George Leeuwen

No 1162, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Firm Size; Productivity; Wages (search for similar items in EconPapers)
JEL-codes: L0 O3 (search for similar items in EconPapers)
Date: 1995-04
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