Friday, 19 February 2010

Big business in the US and European Union

The Financial Times carries an article, by Richard Milne, on the situation of small and medium business in Europe during the international financial crisis. This contains some interesting information on economies of scale and productivity in Europe and the US.

In the US 45% of employment is by enterprises with more than 250 employees, compared to only 33% in the European Union (EU). The definition of a small and medium enterprise (SME) used was that it employed less than 250 people, a small enterprise was defined as employing 10-49 staff, and a micro-enterprise as one with under 10 employees.

The EU contained 20.4 million SMEs and only 43,000 large companies. Of the SMEs 92% were micro-enterprises.

Taking the ratio of SMEs to population the country with the smallest ratio of SMEs to population was Germany – Europe's most successful economy.

The average productivity of labour in European small and medium enterprises was significantly lower than in large enterprises. EU SMEs in 2005, the latest year for which data is available, accounted for 67% of jobs but only 58% of value added. Because of lack of economies of scale EU SMEs had a productivity that was only 86% of the EU average.

The conclusions which flow from this are evident.

First, the higher productivity of the US compared to the EU remains correlated with its higher proportion of the workforce employed in large enterprises – putting another nail in the coffin of 'small is beautiful' confusions.

Second this is almost certainly not only a correlation but a causal connection. If US large enterprises are more productive than SMEs in the same way as the EU pattern, which is highly likely, then the greater proportion of large scale enterprises in the US compared to the EU helps explain the US's higher productivity.

The same pattern appears if the number of SMEs in a country is looked at. Germany, Europe's most competitive economy, had only 20 SMEs per 1,000 inhabitants compared to around 25 for the UK, 40 for the average for the EU, 65 for Italy and 80 for Portugal.

The talk that 'small and medium enterprises' are the key to the economy', 'the future lies with small and medium enterprises' is simply not true – no matter how much it is an ideology which allows right of centre political parties to appeal to the small enterprises which form a key part of their electoral support. The key to high levels of productivity remains, as it has always been, the creation of large scale enterprises. Not for nothing was the US, the world's most productive economy, the home of 'big business'. It is one of the weaknesses of the teaching of academic economics that it has failed to sufficiently integrate the work of Alfred Chandler and other classic historians of US company and industry structure.

The conceptual caution that must be made is first that, as every industry is specific, large scale company development has to be a development of market, or quasi-market, forces and cannot simply be imposed administratively - as was attempted in the former Soviet system. Second, size of company must not be confused with the physical size of units of production. A company may include several physical sites of production – and it is company size, not physical size, which is crucial.

The data in the Financial Times however clearly confirms the correlation of scale of enterprise and productivity. Large scale enterprises, not small and medium ones, continue to represent the 'wave of the future' - the most powerful instrument for raising the productivity of an economy.

Note

In addition to the main theoretical interest of the article noted above it also analyses the squeeze on small and medium enterprises (SMEs) in a number of European countries – for example in Portugal the number of SMEs has fallen by 45% from 489,000 in 2005 to 267,000 at present.

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This article originally appeared on the blog Key Trends in Globalisation.


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