DP1162 Sub-Optimal Scale Firms and Compensating Factor Differentials in Dutch Manufacturing

Author(s): David B Audretsch, A R Roy Thurik, Geroge Van Leeuwen
Publication Date: April 1995
Keyword(s): Firm Size, Productivity, Wages
JEL(s): L0, O3
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1162

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.