The role of scale economies in determining firm size in modern economies

Abstract

Some three to four decades ago, it was generally accepted in economic literature that the average size of firms would continue to increase with progressive economic development. This would be the result of an ever increasing importance of exploitation of scale economies. However, since that time, small-scale self-employment rates have increased in many industrialized countries. This raises the question to what extent scale economies are still important in modern economies. Using data for 23 OECD countries over the period 1972–2008, we test the importance of scale economies in determining average firm size as proxied by the employment to self-employment ratio. We control for several other determinants of firm size, including the rate of urbanization. We also allow the relation to differ across levels of economic development. Our results suggest that notwithstanding the rise of small-scale self-employment observed in many countries over the last few decades, economies of scale and scope continue to play an important role in advanced economies.