Firm Size Classes Research Articles

Financing obstacles for SMEs: the role of politics

PurposeUsing data on over 7500 units from the World Bank Enterprise Survey (WBES) for 2014, the paper assesses the impact of political connections on SME financing obstacles in India.MethodologySince the dependent variable has a meaningful response order and involves several categories, it is appropriate to use the ordered logit model (OLM). We employ the OLM of the STATA program for the estimation process.FindingsThe findings indicate that political connections help alleviate higher-order financing obstacles. In terms of magnitude, senior managers with political connections are 2.5 percentage points less likely to state that there are no financing obstacles, and about 1 percentage point is more likely to state it as a moderate or major obstacle. As well, they are 0.6 percentage point more likely to mention it as a severe obstacle. These results differ across firm ownership type (i.e., male-versus female-owned) and firm size classes and when additional state characteristics are taken on board.LimitationsThe analysis is limited to a single year based on data availability. A much richer analysis would need to assess how such political connections play out over time and its consequences for SME behaviour. Second, our measure of political connection is indirect, since no other measure is reported in the data.OriginalityTo the best of our understanding, this is one of the earliest studies for a leading emerging economy to assess the interlinkage between SME behaviour and their political connections.

Firm size distribution and growth: An empirical investigation

This paper investigates the extent to which the distribution of firm sizes affects growth and productivity. The empirical analysis is underpinned by a multilevel database comprising information on manufacturing sectors of 35 countries disaggregated in five firm size classes. Three complementary strategies to assess the relationship are implemented. The first, a country-level counterfactual analysis, measures the hypothetical impact of a firm reallocation to reflect a benchmark market structure. It is followed by a decomposition exercise that illustrates the impact of both the structural and technological components on the annual productivity growth between 1991 and 2007. Finally, different econometric models are estimated to assess the statistical significance of changes in the firm size distribution on growth and the role of the concentration of the market structure in explaining the cross-country productivity discrepancies. The results suggest that the firm size is a key driver the development process.

Does firm size matter? Decomposing Korean firms’ productivity growth based on a stochastic frontier approach and its policy implications

ABSTRACT Despite the significance of transition in the growth stages, there is a lack of evidence on the different characteristics of firm size in terms of the sources of TFP growth. This study applies a stochastic frontier analysis to Korean firms to decompose the sources of total factor productivity growth into technical progress, technical efficiency changes, scale changes and allocative efficiency changes. Specifically, this study analyses the determinants of TFP growth by firm size (i.e. small-, mid- and large-sized firms) and explores firm-size-specific factors that influence their productivity growth rates. Our results suggest that contributions of four components to TFP growth by firm-size classes show somewhat different patterns. These results imply that each class has different sets of challenges in terms of improving productivity growth potentials. The main findings are expected to lay foundations for designing elaborate firm-size-dependent policies to spur the evolutionary process of a firm’s capacity building.

Sources of variation in growth rate distribution: evidence from Korean, Japanese, and Chinese manufacturing firms

ABSTRACT This study provides a detailed analysis of the growth rate distribution of firms and examines sources of variation in distributional properties. Exploring a large sample of manufacturing firms in Korea, Japan, and China over the period 2010–2017, this study observes heterogeneous properties in the growth rate distribution of groups of firms belonging to the same country, sector, year, and firm size class. Country effects are a major source of variation in distributional properties, particularly determining the growth rate variance and left width of the distribution. The central tendency and tail behaviour of the distribution mainly change over time. Size effects explain the right width of the distribution. However, inter-sectoral distributions do not differ significantly in terms of their distributional properties. This study contributes to understanding underlying growth dynamics of groups of firms, determined by a combination of various factors at different levels, and provides policy implications.

The effect of the Great Recession on the employment growth of young vs. small firms in the Eurozone

This paper examines the uneven impact of the Great Recession on firm-level employment growth across firm size and age classes. Based on firm-level data from ten Eurozone countries, we show that, notwithstanding the negative impact of the crisis, young firms were the most dynamic group of firms and prime contributors to net job creation even during the recession. However, conditional on survival, young firms experienced a sharp drop in their employment growth rates, whereas small firms were mostly unaffected. By using industry-level measures of external financial dependence, we then show how financial frictions were a driver of the growth rates slowdown of young firms.

Exports, Investment and Productivity Growth in Small Firms: A Firm-level Analysis from Tanzania and Ghana

This paper examines the effect of firm-level investment in capital on export entry and productivity growth among different firm size classes using matching and difference-in-differences techniques. We find that firm-level investment in capital reduces the burden of sunk costs of export market entry, thereby inducing small firms to enter export markets with ease and increase their productivity as a result of export market participation. New entrants who survive their first year of exporting also grow their investment levels to consolidate market share. We show that micro and small firms that initiate exporting are more likely to implement firm-level investment as well, one way of technology upgrading, to remain competitive in export markets. Moreover, firm-level investment helps small exporters to generate higher productivity once they engage in export markets. This may suggest that the observed market selection and growth of small firms could be the outcome of distinctive productivity improvements in these firms. We note that investing in capital, especially plant and equipment, may help micro and small firms improve their productive capacity to produce more output at lower unit costs as a result of low-marginal costs of production. Export-led growth policies should be directed at supporting micro and small firms access the much needed financing to upgrade their production processes and improve their productivity.

Exports, Investment and Productivity Growth in Small Firms: A Firm-level Analysis from Tanzania and Ghana

ABSTRACT This paper examines the effect of firm-level investment in capital on export entry and productivity growth among different firm size classes using matching and difference-in-differences techniques. We find that firm-level investment in capital reduces the burden of sunk costs of export market entry, thereby inducing small firms to enter export markets with ease and increase their productivity as a result of export market participation. New entrants who survive their first year of exporting also grow their investment levels to consolidate market share. We show that micro and small firms that initiate exporting are more likely to implement firm-level investment as well, one way of technology upgrading, to remain competitive in export markets. Moreover, firm-level investment helps small exporters to generate higher productivity once they engage in export markets. This may suggest that the observed market selection and growth of small firms could be the outcome of distinctive productivity improvements in these firms. We note that investing in capital, especially plant and equipment, may help micro and small firms improve their productive capacity to produce more output at lower unit costs as a result of low-marginal costs of production. Export-led growth policies should be directed at supporting micro and small firms access the much needed financing to upgrade their production processes and improve their productivity.

Why do some SME's become high-growth firms? The role of employee competences

PurposeHigh-growth firms generate a large share of new jobs and are thus the key drivers of innovation and industry dynamics. As the employees' education supports innovation and productivity, this article hypothesizes that employee competences explain high growth.Design/methodology/approachThe study approaches this by examining intangible capital and specialized knowledge to evaluate how these characteristics support the probability of becoming a high-growth firm. The estimation uses linked employer–employee data from Danish registers from 2005 to 2013.FindingsAs the authors measure high growth with the size-neutral Birch index, they can examine the determinants of high growth across different firm size classes. The findings imply that intangible capital relates positively to the firm's high growth.Originality/valuePrevious research on high-growth firms is concentrated on the owners’ education. This article broadens to the high education of all employees and accounts for the employees’ occupation and capitalization of knowledge with intangible capital.

The effects of highway tolls on private business activity—results from a natural experiment

Abstract The article studies the impact of a switch from free to charged highway provision on firm numbers and private sector employment in a panel of Portuguese municipalities covering the period 2007–2013. It exploits the fact that tolls on certain highways in Portugal were unexpectedly introduced in reaction to the sovereign debt crisis to establish causality. Findings suggest that the price of highway tolls in terms of forgone employment and firm formation may be substantial. Comprehensive analyses of effect heterogeneity reveal that the effects differ across municipalities, sectors and firm size classes. The negative effects of highway tolls are strongest in the municipalities traversed by the newly tolled highways and seem to decrease with distance from these highways, whereas distance to Lisbon aggravates the negative effects of the tolls. We also find that larger firms and manufacturing firms are more strongly affected by the tolls than smaller firms and firms in the service sector and that the negative effect on firm numbers is strongest immediately after the introduction of the tolls, whereas the negative effect on employment increases with the duration of the treatment.

Dimension effects in the relationship between eco-innovation and firm performance: A European comparison

This study investigates the effect of eco-efficiency actions on firm performance, considering both turnover and employment growth, in the European enterprises with different firm size classes. The sample includes 63303 firms from 13 different European Union countries. The main contributions of this work are the use of the most recent Community Innovation Survey (CIS) and the consideration of firms’ size when analysing the relationship between the introduction of environmental benefits and firm performance. Using the ordinary least squares and simultaneous equation models the results showed that eco-innovations may affect negatively turnover growth as well as employment growth, a result which is not sensitive to firms’ size. However, environmental benefits introduced in products, demanded by the end user, are sensitive to the different size class to which the enterprise belongs. Both human capital and the number of adopted eco-innovation strategies influence positively firm performance, revealing to be more sensitive to the firm size. Overall, policy makers should be aware of the size as an important driver, or conditioning factor, for firm performance when forcing firms to introduce policies regarding environmental benefits.

The productivity puzzle and misallocation: an Italian perspective

Productivity has recently slowed down in many economies around the world. A crucial challenge in understanding what lies behind this “productivity puzzle” is the still short time span for which data can be analysed. An exception is Italy where productivity growth started to stagnate 25 years ago. Italy therefore offers an interesting case to investigate in search of broader lessons that may hold beyond local specific cities. We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy's aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within sectors than between them, increasing more in sectors where the world technological frontier has expanded faster. Relative specialization in those sectors explains the patterns of misallocation across geographical areas and firm size classes. The broader message is that an important part of the explanation of the productivity puzzle may lie in the rising difficulty of reallocating resources between firms in sectors where technology is changing faster rather than between sectors with different speeds of technological change

Studying Firm Growth Distributions with a Large Administrative Employment Database

Abstract This paper uses business tax administrative data to describe the annual firm growth rate distribution in Canada over the 2000–2009 period. This administrative tax database provides a unique lense to study firm growth as it allows us to look at the universe of Canadian employer firms and investigate the firm growth distribution across different dimensions. A non-normal, fat-tailed shape for the firm growth distributions holds across years, industries, regions, as well as firm size and age classes. The results show that the distributions of employment growth rates in Canada have more density in both the center and tails than a normal distribution. The evidence paints a picture of firm growth dynamics whereby most firms change very little each year, while a nontrivial amount also markedly grow or decline. A final finding is that young firms, aged four or less, represent a special case with an upwardly skewed distribution and a median growth rate greater than zero.

On the productive efficiency of Australian businesses: firm size and age class effects

After 26 years of growth, the Australian economy is beginning to show signs of stress and declining productivity. In this paper, we consider aspects of productive efficiency using an Australian business population data set. Using a production function approach, several key findings are uncovered. Firstly, decreasing returns to scale are identified as a significant feature of the Australian business sector. This implies that not all firm growth will lead to productivity gains. Secondly, there are significant differences in the way value added is created between small and large firms. In the largest 25% of firms, the capital contribution to value added is four times that of the smallest 25% of firms. Thirdly, efficiency follows an inverted ‘U’ shaped in firm age with the youngest (0–2 years) and oldest (> 9 years) firms being less productive than the middle 50% of firms. Fourthly, there are also huge industry sector variations in productivity. In particular, financial services appears to be the most productively efficient sector in the Australian economy and mining the least efficient.

Technical efficiency in the Italian performing arts companies

This paper evaluates the determinants of firms’ technical efficiency in the Italian Performing Arts (PA) sector, by estimating a stochastic production frontier for an unbalanced panel of 107 firms over the period 2005–2012. The panel data setting allows us to control for both unobserved and observed heterogeneity of PA firms, reaching several interesting and robust findings. Firstly, it finds that the Italian PA firms are scale inefficient as they generally operate in either an increasing or decreasing returns to scale landscape. This result is reinforced by the fact that the smaller firms (10–49 employees) are the most technically efficient firm size class. Secondly, this research proves that the efficiency score is on average 66%, demonstrating that PA firms’ output could be substantially increased without the use of new inputs. Thirdly, it confirms that the quality matters and competences increase the efficiency in the sector. Finally, the environmental factors (especially the quality of institutions) have a strong impact on technical efficiency of PA firms, supporting that regional differences also exist in this sector.

Corporate Tax Concessions in India: Are They Equitable?

In this article, the authors discuss the equity aspects of corporate tax incentives in India and analyse the effectiveness of some of the incentives against their stated objectives. The article attempts to provide an overview of the status of corporate tax concessions in India by comparison with comparable countries, and asks whether the incentives discriminate across size classes of firms in India, whether the incentives are effective in achieving their intended objectives, and whether the government’s stated objective of a reduction in tax rates and incentives will bring about a level playing field.

The perceived benefits of the European Union standardization. An exploration according to firm size and firm capabilities

We examine how the European Union (EU) standardization policy is perceived by firms by exploiting a survey dataset on firms’ benefits. We explore whether perceived benefits are associated with firm size and firm capabilities. We find strong evidence that the perceived benefits of standardization is not equally distributed across firm size classes, industries and countries. Our study indicates that small ventures are less likely to perceive benefits from EU standardization than their larger counterparts, in particular in Eastern European and Mediterranean countries. Additionally, we find evidence that firms with the capabilities to be innovative, exporting and that employ foreign labor are more likely to perceive benefits from standardization than their non–innovative, non–exporting and non–foreign labour–employing counterparts. We suggest EU and EU Member States, in particular in Eastern and Mediterranean Europe, to focus on facilitating standardization compliance by enhancing the critical firm capabilities identified. Stimulation efforts could also be considered to address simultaneously supporting capabilities and standardization literacy.

Financial constraints and productivity growth across the size spectrum: microeconomic evidence from Morocco

To what extent do financial constraints act as conditioning factors on firm productivity? Is this impact different across firm size classes and across sectors and in what way is it different? We explore these issues for Morocco. We use firm level data, taken from two surveys of the World Bank Enterprise Surveys (WES) for Morocco (2004, 2007), to investigate the relationship between two proxies of a firm’s financial constraint (perceived financial constraint as the most serious obstacle and credit constraint) and its productivity growth. The analytical framework assumes a Cobb–Douglas production function for firms where technical progress is not exogenous but depends on financial constraint. Two different econometric estimates are adopted: within estimators and GMM system estimates to address endogeneity and to correct for potential selection, simultaneity and omitted-variable bias (OVB). The estimations using the GMM give results that are consistent with the expectations: they show that each of the two financial constraint proxies has a significant and negative impact on small- and medium-sized firms (i.e. firms with less than 100 workers) but not on large firms (i.e. firms with more than 100 workers). To see whether the main results of the analysis persist (i.e. credit constraints harm small-sized firms more than large-sized firms) several robustness checks are performed. We change the threshold of the separation between small- and large-sized firms from 100 to 50 workers. We keep the threshold at 100 but exclude alternatively small-sized firms that are too small (less than 20 workers) and the large-sized firms that are too large (more than 500 workers). We keep the threshold to 100 and the whole sample but add a control variable which gives the legal status of the firm. Finally, we examine the sensitivity of the results to the sectoral composition of the sample. The main result holds for all sectors except “Wearing apparel”.

Declining Business Dynamism: What We Know and the Way Forward

A growing body of evidence indicates that the U.S. economy has become less dynamic in recent years. This trend is evident in declining rates of gross job and worker flows as well as declining rates of entrepreneurship and young firm activity, and the trend is pervasive across industries, regions, and firm size classes. We describe the evidence on these changes in the U.S. economy by reviewing existing research. We then describe new empirical facts about the relationship between establishment-level productivity and employment growth, framing our results in terms of canonical models of firm dynamics and suggesting empirically testable potential explanations.

Family firms and industrial districts:: Evidence from the Italian manufacturing industry

Family firms and industrial districts represent the pillars of the Italian manufacturing industry. Yet, the interplay between corporate ownership and the districtual organization of the industry has been basically overlooked. This paper reports preliminary evidence on the joint contribution of family firms and industrial districts to the competitive performance of Italian manufacturing firms. Descriptive and econometric analysis shows a positive effect of family ownership on firm profitability, as measured by the industry-adjusted Return on Sale (ROS), whereas the advantage of being located in an industrial district is less evident. Empirical evidence shows that the comparative advantages of family ownership change along the firm size distribution and according to the nature and relevance of the external (districtual) economies. Specifically, the performance impact of the interaction between the “district effect” and the “family effect” changes significantly across firm size classes: while these two effects operate as a substitute in smaller sized classes, they are complements in medium-sized firms. In particular, medium-sized firms (100–250 employees) are the best at leveraging the benefits of districtual organization, but only in the case of family ownership.

Evaluating Small Businesses' Performance in Public e‐Procurement: Evidence from the Italian Government's e‐Marketplace

e‐Procurement is widely advocated as an effective tool to promote the participation of small and medium enterprises () as well as micro enterprises in the public procurement market. However, little evidence exists as to what factors may influence the allocation of contracts to differently sized suppliers. We address this issue by analyzing a rather rich and unique data set, namely the “direct award” (low‐value) transactions that took place on the Italian e‐marketplace during the period 2005–2010.In this paper, we exploit data from low‐value transactions to test the impact of different structural dimensions of the national public e‐marketplace on the probability that firms of different size are awarded public contracts, particularly focusing on micro and small firms. We find that both the nature of the public buyer and the characteristics of the traded goods/services do have an impact on different firms' ability to be awarded public contracts. We also test to what extent the geographical distance between public buyers and private suppliers explains the propensity of different size class of firms to be awarded public contracts, proving, at least to some extent, that some features of “physical” procurement markets are mirrored in the “virtual” market.