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Article
Market selection and scale inefficiency: a new methodology applied to EU business services
Structural Change and Economic Dynamics (2013)
  • Henk LM Kox, CPB Netherlands Bureau for Economic Policy Analysis
  • George vann Leeuwen
Abstract

The paper proposes a new way of analysing the efficiency of dynamic market selection, based on the persistence of scale economies. The new methodology is used to investigate the causes of stagnating productivity growth in EU business services. An efficient market ensures that more productive firms grow faster than others. Conversely, firms with weaker performance would be outcompeted and shrink, and eventually go broke. This paper uses scale diseconomies and their persistence as indicator for the effectiveness of market selection. We use a DEA method to construct the productivity frontier by sub-sector and size class, for business services in 13 EU countries. From this we derive scale economies and their development over time. Our results indicate malfunctioning competitive selection. Between 1999 and 2005 we observe a persistence of scale diseconomies, with scale efficiency falling rather than growing over time. In panel regressions we find the distance to the productivity frontier (within and between size classes) to be significantly explained by regulatory policies that hamper entry and exit dynamics and labour adjustment, and by a lack of import penetration and domestic start-ups. The results suggest that policy reform and more market openness may have positive productivity effects. This holds for business services itself, but also wider, because of business services’ large role in intermediary production inputs.

Keywords
  • market selection,
  • scale economies,
  • entry and exit costs,
  • regulation,
  • import competition,
  • EU internal market,
  • productivity frontier
Publication Date
June, 2013
Citation Information
Henk LM Kox and George vann Leeuwen. "Market selection and scale inefficiency: a new methodology applied to EU business services" Structural Change and Economic Dynamics Vol. 25 Iss. June (2013)
Available at: http://works.bepress.com/henk_kox/52/