What Determines Firm Size?

Abstract:     
In this paper we examine data on firm size from Europe to shed light on factors correlated with firm size. In addition to studying broad patterns, we use the data to ask whether it is sufficient to think of the firm as a black box as some theories of the firm that we label "technological" do, or whether we need to be concerned with features such as asset specificity and the process of control that are the focus of "organizational" theories. At the industry level, we find capital-intensive industries, high wage industries, and industries that do a lot of R&D have larger firms. While these results are broadly consistent with both types of theories, we find that at the country level organizational theories fare better - countries that have better institutional development, as measured by the efficiency of their judicial system, have larger firms and, once we correct for institutional development, there is little evidence that richer countries or countries with higher average human capital have larger firms. The study of the effects of interactions between an industry's characteristics and a country's environment on size is perhaps the most novel aspect of this paper, and best allows us to discriminate between theories. A central result is that as the judicial efficiency improves, the difference in size between firms in physical capital intensive industries and those in less capital intensive industries diminishes. Similarly, an improvement in patent protection in a country is associated with an increase in the size of firms in R&D intensive industries. These findings are consistent with "Critical Resource" theories of the firm.

Number of Pages in PDF File: 54

JEL Classification: D23, G30, K40, L20

working papers series