The Pursuit of the Efficient Scale Size: Implications for Firm Growth

Abstract

The paper examines the longitudinal impact that returns to scale and organisational variables have upon firm sales' growth. To attain this, and using a Spanish data set for the period 1995-2001, we introduce a non-parametric technique (Data Envelopment Analysis) to obtain qualitative information about the returns to scale exhibited by firms. In a second step, we carry out a regression analysis using the GMM technique in order to address endogeneity and firm specific effects. The main contribution of the paper indicates that returns to scale and their dynamics over time are important determinants of firm growth. Our findings reveal that firms that reached the technological interval characterised by constant returns to scale show higher growth rates, where technological change and efficiency improvements are important determinants of this process. In addition, empirical findings indicate that ownership concentration improves monitoring tasks within the firm leading to higher growth rates. However, we also find that ownership concentration may create costs that outweigh its benefits, and this is especially relevant when the main shareholder also serves as chairman.

Keywords: Firm growth, minimum efficient size, returns to scale, ownership structure

JEL Classification: D2, G3, L2