Returns to scale in the French manufacturing industry

Abstract

The link between the size of a company and its economic performance is of considerable importance when seeking to understand changes in the productive process and company population movements. The size-efficiency relationship in companies is studied here by estimating explicit production functions from individual data on 3,200 industrial firms belonging to the Banque de France Balance Sheet Data Centre. The proposed production function generalizes the Solow function by allowing variations in returns to scale depending on company size (e.g. first rising, then constant, then diminishing returns). This model is estimated for each sector of the 40-item nomenclature and in most cases rejects the hypothesis of constant returns, in favour of optimal sizes mid-way between the largest and the smallest, in seven out of twenty-one sectors. In six other sectors, the optimal size is the largest, and in two sectors, the most productive firms are the smallest. In one sector only, production of household durables, are returns constant.