Small firms in Portuguese manufacturing: realising the potential in employment and technical efficiency

Abstract

The objective of this paper is to assess the potential of Portuguese manufacturing firms with respect to two fundamental issues that have been at the core of important debates about comparative advantages of small firms and large ones: (1) Employment: Using a database compiled between 1982 and 1992, we analyse the contribution of small firms to job creation. This analysis aims to consider the different aspects of firm mobility: Entry, expansion, contraction and exit. The results indicate that, in the period considered, only small firms created employment and that this creation is mainly associated with the expansion of young firms located in the Littoral North and Centre regions of Portugal. Nevertheless, when we consider only small firms that are incumbents in all the period, results indicate that job creation is a feature specific to a small number of fast‐growing small firms. The effects of the economic cycle were tested too, and it was found that employment creation by small firms is less sensitive to economic fluctuations, as reductions in employment in small firms do not seem to grow in crisis periods. (2) Technical efficiency: Independently from the job creation potential, it is important to evaluate whether small firms use economic resources in an efficient manner. To assess the efficiency of small businesses relative to large ones, we use plant‐level information, thereby specifying and estimating a translog production model. This model allows estimating and comparing returns of scale and substituting elasticities for both small and large production units, covering a large number of six‐digit sectors for the year 1995. Preliminary results suggest that: (I) There are significant differences in the production technology between large and small establishments; (ii) small establishments do not appear to be more flexible than large ones in factor substitution; (iii) large size is not a condition for efficiency in production. Therefore, considering the importance and weight small firms have upon the manufacturing industry employment volume, and the lack of any evidence regarding technical inefficiencies in the production, we may infer that small firms justify the public powers’ attention, while designing and implementing policies which would support their survival as well as their growth. Such policies should enhance and refine their labour (and management) qualification techniques as well as design better strategies for disseminating information and new technologies. In fact, these policies would most certainly promote the development of Portuguese small firms, turning them into more innovating, flexible and competitive ones, even in those industries which traditionally comprise large firms.

Citation

Correia, I.M. (2001), "Small firms in Portuguese manufacturing: realising the potential in employment and technical efficiency", Journal of Small Business and Enterprise Development, Vol. 8 No. 4, pp. 363-375. https://doi.org/10.1108/EUM0000000006832