Project Management

Competitive, But Too Small - Productivity And Entry-Exit Determinants In European Business Services

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Executive Summary

The paper investigates whether scale effects, market structure, and regulation determine the poor productivity performance of the European business services industry. The authors apply parametric and nonparametric methods to estimate the productivity frontier and subsequently explain the distance of firms to the productivity frontier by market characteristics, entry- and exit dynamics and national regulation. The frontier is assessed using detailed industry data panel for 13 EU countries. The estimates suggest that most scale advantages are exhausted after reaching a size of 20 employees. This scale inefficiency is persistent over time and points to weak competitive selection. Market and regulation characteristics explain the persistence of X-inefficiency (sub-optimal productivity relative to the industry frontier).

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