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Market Structure, Productivity and Scale in European Business Services

In: Business Services in European Economic Growth

Author

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  • Henk Kox
  • George Leeuwen
  • Henry Wiel

Abstract

Labour productivity in the business-services industry tends to lag behind the rest of the economy. The present chapter investigates whether or not labour productivity in European business services is affected by unexploited economies of scale. In addition, it analyses whether the incidence of scale suboptimality 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. A main result is that we find evidence for the existence of increasing returns to scale in business-services firms. Throughout the EU, firms with fewer than 20 persons have a significantly lower average level of labour productivity than the rest of the business-services industry. We find two explanatory factors for the level of scale inefficiency. The first is the level of policy-caused firm-entry costs; higher start-up costs for new firms go along with more scale inefficiency for business-services firms. Secondly, we find evidence that business-services markets tend to be segmented by firm size: firms tend to compete predominantly with other firms of similar size. Scale-related inefficiencies may to some extent be 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.

Suggested Citation

  • Henk Kox & George Leeuwen & Henry Wiel, 2007. "Market Structure, Productivity and Scale in European Business Services," Palgrave Macmillan Books, in: Luis Rubalcaba & Henk Kox (ed.), Business Services in European Economic Growth, chapter 11, pages 195-212, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-22879-5_12
    DOI: 10.1057/9780230228795_12
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    Cited by:

    1. Kox, Henk L.M. & Rubalcaba, Luis, 2007. "Business services and the changing structure of European economic growth," MPRA Paper 3750, University Library of Munich, Germany.
    2. Polder, Michael & Leeuwen, George van & Mohnen, Pierre & Raymond, Wladimir, 2010. "Product, process and organizational innovation: drivers, complementarity and productivity effects," MERIT Working Papers 2010-035, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. Kox, Henk L.M. & Lejour, Arjan, 2006. "Dynamic effects of European services liberalisation: more to be gained," MPRA Paper 3751, University Library of Munich, Germany.
    4. Polder, Michael & Leeuwen, George van & Mohnen, Pierre & Raymond, Wladimir, 2009. "Productivity effects of innovation modes," MPRA Paper 18893, University Library of Munich, Germany.
    5. Stefan Mann & Klaus Mittenzwei & Franziska Hasselmann, 2013. "The importance of succession on business growth: A case study of family farms in Switzerland and Norway," Journal of Socio-Economics in Agriculture (Until 2015: Yearbook of Socioeconomics in Agriculture), Swiss Society for Agricultural Economics and Rural Sociology, vol. 6(1), pages 109-137.

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    More about this item

    Keywords

    Labour Productivity; Firm Size; Business Service; Efficiency Frontier; Market Concentration;
    All these keywords.

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D2 - Microeconomics - - Production and Organizations
    • L8 - Industrial Organization - - Industry Studies: Services

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