Market structure, productivity and scale in European business services

Henk Kox, George Leeuwen and Henry Wiel

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: EU; business services; scale efficiency; labour productivity; regulation; entry costs (search for similar items in EconPapers)
JEL-codes: D2 L11 L5 L8 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-eec, nep-eff, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Chapter: Market Structure, Productivity and Scale in European Business Services (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:6137

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