Bigger is better: Large companies good for the economy, study finds
Large companies contribute disproportionately more to a country’s economic performance than smaller ones, according to a new EU-funded survey.
Bigger corporations are more productive, they pay higher wages, enjoy higher profits, and are more successful in international markets, said the report by European Firms in a Global Economy (EFIGE), an EU-funded project.
Therefore, a country's economic performance can be linked to its number of big corporations, says the survey, which was carried out under the supervision of Brussels-based think tank Bruegel.
This is one of the conclusions in EFIGE's new report, Breaking down the barriers to firm growth in Europe. The report systematically explores the interaction between firm and country characteristics through a survey of about 15,000 manufacturers in Austria, France, Germany, Hungary, Italy, Spain and the United Kingdom.
Differences in the firm size profile of different European countries are dramatic, according to EFIGE. Companies in Spain and Italy are, for example, on average 40% smaller than those in Germany.
According to the authors of the report, it is important to understand the roots of the differences as they are "key to improving the economic performance of Europe’s lagging economies."
The low-average firm size translates into a chronic lack of large firms. In Spain and Italy a mere 5% of manufacturing firms have more than 250 employees, compared to a much higher 11% in Germany. The average firm size in Spain and Italy is, respectively, 49.3 and 42.7 employees, compared to 76.4 on average in Germany.
Analysts say large companies are more innovative
In all the countries in the survey, the exporting firms are also found to be larger and do more research and development (R&D).
"This suggests that barriers to R&D and trade are the main culprits that slow down firm growth. Countries that face higher trade costs provide fewer opportunities for businesses to become large. And a relative absence of R&D spending puts a break on firm growth, leading to a size distribution skewed towards smaller firms," the report said.
Trade and innovation are not independent, but interact in significant ways. For example, a reduction in trade costs tends to stimulate innovation as it allows firms to become larger. This makes it easier for the firm to bear the fixed costs of R&D.
To identify the barriers to firm growth, the authors behind the report say a model is needed to analyse different factors such as trade costs, innovation costs and tax distortions.
For example, if trade was to be ignored, then the model would predict that both Spain and Italy have high innovation costs. But once trade is introduced, the model finds that the large proportion of small firms in Italy is mainly due to high innovation costs, whereas in Spain it is due to a combination of high trade and high innovation costs.
If Italy wants to reduce the barriers to business growth, the country should mainly focus on promoting innovation. In Spain the emphasis should also be on cutting trade costs and improving access to international markets.
The EU has adopted a 10-year growth plan, called 'Europe 2020' (>> see our LinksDossier).
The strategy, agreed in June 2010 by the EU's heads of state, defined five 'headline targets' that would need to be adapted at national level to reflect local differences:
- Raising the employment rate of the population aged 20-64 from the current 69% to 75%.
- Raising the investment in R&D to 3% of the EU's GDP.
- Meeting the EU's climate change and energy objective for 2020 to cut greenhouse gas emission by 20% and source 20% of its energy needs from renewable sources.
- Reducing the share of early school leavers from the current 15% to under 10% and making sure that at least 40% of youngsters have a degree or diploma.
- Reducing the number of Europeans living below the poverty line by 25%, lifting 20 million out of poverty from the current 80 million.
President of European Small Business Alliance (ESBA), a non-party political group, David Caro commented on the report:
"There is a paradox to be found here. We all agree that small and medium seized enterprises (SMEs) are the 'backbone of the European economy' and we look to our small companies to get us out of the crisis, yet large businesses still contribute disproportionately more to our economy. Unfortunately, this reaffirms the message that we have been voicing for years: cut down on the regulatory and administrative burden for SMEs, improve access to and cost of finance and allow small businesses to prosper, innovate and grow," Caro said.
"The one-size-fits-all approach does not work; small businesses cannot deal with the same rules and regulations as their large counterparts, which is why we need to fully implement the Think Small First principle once and for all. Less than one percent of EU businesses are large companies. The EU institutions have a responsibility to maximise the growth potential of the remaining 99% of European businesses, in order to become truly competitive," he added.