The Effects of Economy Size on Firm Performance: Evidence from the Telecommunications Sector

Abstract

The main argument of this paper is that large economy size is a necessary but not sufficient condition for higher firm performance. Existing positions in the literature consider firms operating in small economies disadvantaged on the grounds of small size limitations. Recent evidence suggests that firms in small economies may exhibit comparable relative performance with corresponding firms in larger contexts. I distinguish small from large economies based on geographic, economic, and demographic criteria and employ Stochastic Frontier Analysis to empirically examine the effects of economy size on the efficiency of 54 incumbent telecommunications firms for the period 1990-2007. I concomitantly account for the effects of sector-specific policies and economy-wide factors. The results show that economy size has a positive effect on firm efficiency albeit at a decreasing rate. A firm’s market structure, internal governance, and the economy’s quality of institutional endowments play an important role in firm performance. The research findings are used in making recommendations to firms from small economies for enhancing performance.

Keywords: small economies, economy size, firm performance, efficiency analysis, telecommunications, industrial change

JEL Classification: D24, L11, L52, L96