The Economist: Decline and small
Small firms are a big problem for Europe’s periphery
... Greece stands out among European Union countries as having the most stunted firms. Around a third of Greek manufacturers are “micro” firms with fewer than ten workers, compared with 4.3% of firms in Germany (see left-hand chart). But the small-firm problem also afflicts the other troubled economies at the euro zone’s southern periphery. Spain lacks biggish manufacturers; Italy’s small-firm bias derives in part from a reverence for family firms. Only 19% of Portuguese manufacturers have 250 or more workers, compared with 55% of industrial firms in Germany. “The incredible shrinking Portuguese firm” is the title of a research paper* by three economists at Carnegie Mellon University, which shows that Portugal had more small firms and fewer big ones in 2009 than it had in the 1980s. The authors find the trend has been towards larger firms in America, as well as in Denmark, a country of comparable size to Portugal.
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.
The periphery’s productivity malaise is the result of the rigid rules that govern jobs and goods markets. In theory the key to prosperity is the amount of physical capital and skilled workers in an economy, and how they are combined. But the quality of companies will vary so it matters greatly where—as well as how well and how much—capital and skills are deployed. If restrictive rules mean that resources are trapped in inefficient firms, it leaves the best companies starved of them. The result is sluggish productivity. The Carnegie Mellon economists blame Portugal’s shrinking firms on its employment laws, which are among the strictest in the OECD (though becoming more forgiving) and act as a tax on firm size, because small firms are sheltered from them. ...