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
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)
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