Wednesday, 7 March 2012

Small firms are a big problem for Europe’s periphery

Or so claims the Economist. They write,
A bias to small firms is costly. The productivity of European firms with fewer than 20 workers is on average little more than half that of firms with 250 or more workers (see right-hand chart). The deeper roots of the euro-zone crisis lie with the loss of competitiveness in the region’s trouble spots. This problem owes more to dismal productivity growth in the past decade than to rapid wage inflation. If the best small firms were able to grow bigger, Greece and the rest might solve their competitiveness problems without having to cut wages or leave the euro.
But why is small bad? Isn't firm size, like so many of the characteristics of firms, dependent on the situation of the firm? Don't we need some comparative institutional analysis here? Any display of inefficiency simultaneously represents an opportunity for mutual gain, the parties to such transactions have an incentive to relieve inefficiencies (in cost-effective degree). What are the obstacles? What is the best feasible result?

Also how are they measuring productivity here? There are problems in productivity measurement in areas like the service sector of the economy.

I mean do you really think having a law firm of 250 people is going to be more efficient than one of 5 people? For a start how do you get 250 partners to agree on anything?! The time and effort it would take just to make decisions would be huge and would make the firm inefficient.

So size may not be the problem, it may be the result of deeper problems in the troubled economies of Europe. Size and low productivity may be correlated without any causation. A third problem may lead to both small size and low productivity.

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