Returns to scale, productive efficiency, and optimal firm size evidence from Taiwan's firm data

Abstract

By using Taiwan's census firm data, this paper estimates and tests the variable returns to scale hypothesis for aggregate manufacturing and two-digit industries. An efficiency measure is constructed to further examine the size-efficiency relations among two-digit industries. Analysis indicates that increasing returns exist at the aggregate manufacturing level and its magnitude is higher for exporting firms than for non-exporting firms. Moreover, trade is beneficial only for small firms. However, the property of increasing returns diminishes for most of the industries at the two-digit level, particularly for the exporting firms. This sharp comparison between aggregate and two-digit level results suggests that trade is conducive to productivity, and provides an indication of the specific form of technology spillovers among firms and across industries. Further investigation of the relationship between productive efficiency and firm size renders the result that optimal firm size is small for exporting firms in most industries, particularly in the most export-oriented ones. The technology spillover effect among firms and across industries is likely the reason for being small and efficient. Our results also indicate that an industry-wide spillover effect across firms within the same industry is roughly one-sixth of the firm-specific export-induced learning effect. Findings in this study provide valuable insight into Taiwan's economic development and also provide a development strategy for developing countries to follow.