Measuring dynamic market selection by persistent scale inefficiencies - new methodology applied to EU business services

Kox, Henk L.M. and Leeuwen, George van (2011): Measuring dynamic market selection by persistent scale inefficiencies - new methodology applied to EU business services.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: market selection; scale economies; entry and exit costs; regulation; import competition; EU internal market; productivity frontier
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; L - Industrial Organization > L5 - Regulation and Industrial Policy; L - Industrial Organization > L8 - Industry Studies: Services > L84 - Personal, Professional, and Business Services; D - Microeconomics > D2 - Production and Organizations; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade

References

Aghion, Ph. and R. Griffith, 2005, Competition and growth - reconciling theory and evidence, The MIT Press, Cambridge MA.

Aghion, P. and G. Saint-Paul, 1993, Uncovering some causal relationships between productivity growth and the structure of economic fluctuations: a tentative survey, NBER WP #4603, NBER, Cambridge, MA.

Antipi, P. and M.E. de la Serve, 2010, International comparisons of industry-based productivity levels in the financial and business service sectors, International Productivity Monitor, 19 (Spring), 66-81.

Ark, B. van, M. O'Mahony and M. Timmer, 2008, The productivity gap between Europe and the United States: trends and causes, GGDC Research Memorandum GD-89, Groningen Growth and Development Center, Groningen.

Arnold, J., G. Nicoletti and S. Scarpetta, 2008, Regulation, Allocative Efficiency and Productivity in OECD Countries: Industry and Firm-Level Evidence, OECD Economics Dept. WP No.616, OECD, Economics Dept., Paris.

Arnold, J., G. Nicoletti and S. Scarpetta, 2011, Does anti-competitive regulation matter for productivity? Evidence from European firms, IZA DP No. 5511, IZA, Bonn.

Axtell, R., 2006, Firm Sizes: Facts, Formulae, Fables and Fantasies, Center on Social and Economic Dynamics Working Paper No.44, Brookings, Washington.

Axtell, R., 2001, Zipf Distribution of U.S. Firm Sizes, Science, 293, 1818-1820.

Baker, P., and I. Miles, 2008, Study on industrial policy and services, Commissioned by the European Commission (DG Enterprise), ECORYS, Brussels / Rotterdam.

Banker, R., W. Cooper, L. Seiford, R. Thrall and J. Zhu, 2004, Returns to scale in different DEA models, European Journal of Operational Research, 154, 345–362.

Bartelsman, E. and M. Doms, 2000, Understanding productivity: lessons from longitudinal micro data, Journal of Economic Literature, 83 (3), 569-594.

Battese, G. and T. Coelli, 1995, A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data, Empirical Economics, 20 (2), 325-32.

Baumol, W., J. Panzar and R. Willig, 1982, Contestable Markets and the Theory of Industry Structure, Harcourt Brace Jovanovich, New York.

Biatour, B., M. Dumont and C. Kegels, 2011, The determinants of industry-level total factor productivity in Belgium, Working Paper No.7-11, Federal Planning Bureau, Brussels.

Boone, J., 2004, A New Way to Measure Competition, CEPR DP #4330, C.E.P.R. , London.

Boone, J., J. van Ours and H. van der Wiel, 2007, How (not) to measure competition, CEPR DP #6275, London.

Boone, J., 2008, A new way to measure competition, Economic Journal,. 118(531), 1245-1261.

Bourlès, R., G. Cette, J. Lopez, J. Mairesse and G. Nicoletti, 2010, Do product market regulations in upstream sectors curb productivity growth? - panel data evidence for OECD countries, Document de Travail No. 283, Banque de France, Paris.

Brown, C, J. Haltiwanger and J. Lane, 2006, Economic turbulence: is a volatile economy good for America?, University of Chicago Press, Chicago.

Buti, M., S. Deroose et al., 2010, Surveillance of intra-Euro-Area competitiveness and imbalances, European Economy, 2010(1), DG Economic and Fianancial Affairs, European Commission, Brussels.

Caballero, R. and M. Hammour, 1994, The cleansing effect of recessions, American Economic Review, 84, 1350-68.

Cantner, U., J. Krüger and H. Hanusch, 2007, Produktivitäts- und Effizienzanalyse - Der nichtparametrische Ansatz, Springer, Berlin-Heidelberg.

Coelli, J., D. Prasada Rao, C. O'Donnell and G. Battese, 2005, An Introduction to Efficiency and Productivity Analysis, Springer, New York.

Conway, P. and G. Nicoletti, 2006, Product market regulation in the non-manufacturing sectors of OECD countries: measurement and highlights, draft paper, Economics Department, OECD.

Coviello, D., A. Ichino and N. Persico, 2010, Don’t spread yourself too thin: the impact of task juggling on workers’ speed of job completion , NBER WP #16502, NBER, Cambridge (Ma).

De Wit, G., 2005, Firm size distributions - an overview of steady-state distributions resulting from firm dynamic models, International Journal of Industrial Organization, 23, 423-450.

Dixit, A. and J. Stiglitz, 1977, Monopolistic competition and optimum product diversity, American Economic Review, 67, 297-308.

Djankov, S., R. La Porta, F. Lopez, and A. Shleifer, 2002, The regulation of entry, Quarterly Journal of Economics, 117 (1), pp 1-37.

Emrouznejad, A., B. Parker, and G. Tavares, 2008, Evaluation of research in efficiency and productivity: A survey and analysis of the first 30 years of scholarly literature in DEA, Socio-Economic Planning Sciences, 42 (3), 151-157.

Ewijk, C. van, 1997, Entry and exit, cycles, and productivity growth, Oxford Economic Papers, 49 , 167-187. Foster, L., J. Haltiwanger and C. Krizan, 1998, Aggregate productivity growth: lessons from microeconomic evidence, NBER Working Paper 6803, NBER, Cambridge MA.

Francois, J., 1990, Producer services, scale and the division of labour, Oxford Economic Papers, 42, 715-729.

Grilo, I. et al., 2009, Product Market Review 2009: microeconomic consequences of the crisis and implications for recovery, European Economy 2009 (11), DG Economic and Financial Affairs, European Commission Brussels.

Gust, C. and J. Marquez, 2002, International comparisons of productivity growth: the role of information technology and regulatory practices, International Finance Discussion Papers, #727, Federal Reserve System.

Hsiao, Ch., 2006, Panel data analysis - advantages and challenges, IEPR WP#06-49, Institute of Economic Policy Research, USC, Los Angeles.

Hulten, C., 2001, Total factor productivity: a short biography, in C. Hulten, E. Dean and M.Harper, eds., New Developments in Productivity Analysis, Studies in Income and Wealth, vol. 63, Chicago: University of Chicago Press , pp. 1–47

Ilzkovitz, F., A. Dierx and N. Sousa, 2008, An analysis of the possible causes of product market malfunctioning in the EU: First results for manufacturing and service sectors, European Economy - Economic Papers 336, DG Economic and Monetary Affairs, European Commission, Brussels.

Johnson, N., S. Kotz and N. Balakrishnan, 1994, Continuous univariate distributions, John Wiley, New York.

Jorgenson, D., M. Ho, and K. Stiroh, 2005, Information technology and the American growth resurgence, Cambridge, MA: MIT Press.

Jovanovic, B., 1982, Selection and the evolution of industry, Econometrica, 50, 649-670.

Kessides, I., 1988, Market structure and sunk costs: an empirical test of the contestability hypothesis, WP #88-50, Economics Dept.,University of Maryland, Maryland.

Klette, J., 1999, Market power, scale economies and productivity: estimates from a panel of establishment data, The Journal of Industrial Economics, 47 (4), 451-476.

Klapper, L., L. Laeven and R. Rajan, 2006, Entry regulation as a barrier to entrepreneurship, Journal of Financial Economics, 82 (3), 591-629.

Kox, H. and A. Lejour, 2006, The effect of the Services Directive on intra-EU trade and FDI, Revue Economique, 57 (4), 747-769.

Kox, H., A. Lejour and R. Montizaan, 2004, The free movement of services within the EU, CPB Document 69, CPB Netherlands Bureau for Economic Policy Analysis, The Hague.

Kox, H., G. van Leeuwen and H. van der Wiel, 2010, Small firms captive in a box like lobsters: causes of poor productivity performance in European business services, CPB Discussion Paper #158, CPB, The Hague.

Markusen, J., 1989, Trade in producer services and in other specialized intermediate inputs, American Economic Review, 79, 85-95.

Marrewijk, C. van, J. Stibora, A. de Vaal and J.-M. Viaene, 1997, Producer services, comparative advantage, and international trade patterns, Journal of International Economics, 42, 195-220.

Nicoletti, G. and S. Scarpetta, 2003, Regulation, productivity and growth: OECD evidence, Economic Policy No.36, April.

Nordås, H. and H. Kox, 2009, Quantifying regulatory barriers to services trade, OECD Trade Policy Working Paper No. 85, OECD, Paris.

O’Mahony, M. and M. Timmer, 2009, Output, input and productivity measures at the industry level: the EU KLEMS database, The Economic Journal, 119 (June), F374–F403.

O'Mahony,M., A. Rincon-Aznar & C.Robinson, 2010, Productivity growth in Europe and the US: a sectoral study, Review of Economics and Institutions, 1(1).

Olley, G. and A. Pakes, 1996, The dynamics of productivity in the telecommunications equipment industry, Econometrica, 64, pp. 1263-1297.

Paterson, I., M. Fink, and A. Ogus, 2003, Economic impact of regulation in the field of liberal professions in different Member States - regulation of professional services, Institute for Advanced Studies, Vienna.

Post, T., 1999, Finding the Frontier, Methodological Advances in Data Envelopment Analysis, Ph.D Thesis, Erasmus University, Rotterdam.

Rubalcaba, L. and H. Kox, 2007, Business services in European economic growth, Palgrave MacMillan, Basingstoke/ New York.

Schreyer, P., 2001, Measuring productivity - measurement of aggregate and industry-level productivity growth: OECD manual, OECD, Paris.

Shy, O., 2001, The economies of network industries, Cambridge University Press, Cambridge.

Schwartz, M., 1986, The nature and scope of contestability theory, Oxford Economic Papers, 38 (Supplement November), 37-57.

Triplett, J. and B. Bosworth, 2004, Productivity in the US services sector: new sources of economic growth, Brookings Institution Press, Washington.

Zhu, J., 2009, Quantitative models for performance evaluation and benchmarking, 2nd edition. Springer, Berlin.