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Dynamic market selection in EU business services

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  • Henk Kox
  • George van Leeuwen

    (CBS)

Abstract

European business services has witnessed about two decades of virtual productivity stagnation. The paper investigates whether this is caused by weak dynamic market selection. The time pattern of scale-related inefficiencies is used as an indicator for the effectiveness of market selection. We use a DEA method to construct the productivity frontier by sub-sector and size class, for business services in 13 EU countries. From this we derive scale economies and their development over time. Between 1999 and 2005 we observe a persistence of scale inefficiencies and X-inefficiencies, with scale efficiency falling rather than growing over time. This indicates malfunctioning competitive selection. The time pattern of inefficiencies is significantly explained by regulatory policies that hamper entry and exit dynamics and labour adjustment, and by a lack of import penetration. The results suggest that policy reform and more market openness may have positive productivity effects. This holds for business services itself, but also wider, because of business services’ large role in intermediary production inputs.

Suggested Citation

  • Henk Kox & George van Leeuwen, 2012. "Dynamic market selection in EU business services," CPB Discussion Paper 210, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:210
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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • D2 - Microeconomics - - Production and Organizations
    • L8 - Industrial Organization - - Industry Studies: Services

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