Small firms and economic growth in europe

Economic activity in manufacturing industries moved away from large firms toward small firms in many Organization for Economic Cooperation and Development countries during the last two decades. However, the speed of this industrial transformation process has varied considerably across countries. This paper investigates the consequences of lagging behind in this restructuring process in manufacturing. A sample of 14 manufacturing industries in 13 European countries has been constructed for this purpose. It is found that, on average, the employment share of large firms in 1990 has a negative effect on output growth in the subsequent four-year period. This provides support for specific policies introduced during the 1980s in European countries stimulating small enterprises.This study benefitted from a grant by the Research Centre for Economic Policy (OCFEB), Faculty of Economics, Erasmus University, Rotterdam.