The Effect of SME Productivity Increases on Large Firm Productivity in the EU

Abstract

SummaryWe examine the impact of labour productivity growth of small and medium‐sized enterprises (SMEs) on labour productivity growth of large firms in a 19‐year panel of 26 European countries. We apply a dynamic panel data model that allows for macro‐level interdependencies in productivity between small and large firms. Our main finding concerns a sizable positive effect of labour productivity increases of SMEs on the productivity of large firms. This positive effect is especially evident for medium‐sized and small firms (rather than micro firms). Furthermore, the impact of SME productivity on large‐firm productivity is increasing with the size of the SME sector. Our analysis indicates that scale effects play a role in the transmission of productivity effects from SMEs to large firms, both in terms of the size of individual SMEs (medium‐sized and small versus micro) and in terms of the share of the SME sector in the economy.