6. Productivity in SMEs and large firms

Developments at aggregated industries levels can mask heterogeneity in productivity among firms within the same industry. For instance, it may be interesting to look at the contribution of small and medium-sized enterprises (SMEs). In several countries, a considerable number of low-productivity firms (many of them small firms) coexists with large firms that are highly productive and exposed to international competition. Productivity tends to increase with firm size, as large firms can benefit from increasing returns to scale. Firm-level productivity also depends on the industry enterprises are operating in. In addition, large firms tend to adopt new technologies more than small firms, unless the latter are new or younger companies.

While new small firms can also spur aggregate productivity growth when they exploit new technologies and stimulate productivity-enhancing changes by incumbents, severe economic downturns can lead to a missing generation of start-ups (OECD, 2023[1]). This has usually marginal effects in the short term, but the absence of these start-ups may affect long-term productivity, as they play a key role in competition, innovation (Kolev et al., 2022[2]) and job creation (Criscuolo, Gal and Menon, 2016[3])

Scale-up dynamics could also impact firms’ productivity. Firms that scale up in employment tend to be more productive as they enter their high-growth phase and then catch up with their peers as they grow. While firms that scale up in turnover tend to expand their workforce in the year before scaling (leading to a drop in productivity), their employment grows more slowly on average during the subsequent period of high turnover growth, making them more productive than comparable non-scalers (OECD, 2021[4]). Finally, human capital (e.g., workforce skills, management skills) is another key factor that explains differences in productivity across firms (Criscuolo et al., 2021[5]).

  • Large firms in the business sector had higher labour productivity compared to smaller companies in OECD countries. The largest gaps in labour productivity levels in 2021 or the latest available year – measured as value added per person employed – between large and smaller firms were observed in Ireland and Korea (Figure 6.1). The gap in Ireland is mainly due to the presence of multinationals, which benefit from low statutory income tax rates (OECD, 2022[6]). In Korea, large firms have considerable market power, higher margins and capacity to invest than SMEs, widening the productivity gap between large and smaller Korean firms (OECD, 2022[7]).

  • In manufacturing, the productivity gap between large and smaller firms was on average more pronounced than in the business economy as a whole, reflecting returns to scale from capital-intensive production (Figure 6.2). Among OECD countries for which data is available, micro manufacturing firms in Türkiye had the biggest productivity gap relative to large enterprises. In Ireland, both small and medium-sized manufacturing firms had the largest gap with respect to large firms as compared to OECD peers. Conversely, small and medium-sized enterprises in Estonia had the smallest productivity gap.

  • Compared with manufacturing, differences in labour productivity between firms of different sizes are less pronounced in business services. In some OECD countries, smaller firms even outperformed large ones in terms of labour productivity (Figure 6.3). This reflects competitive advantages in niche activities with high brand value or intellectual property content, and the intensive use of information and communication technologies (ICT). Compared to manufacturing, the size advantage of large firms is reduced in knowledge-intensive services, with start-ups and young firms having a higher probability of successfully transforming knowledge into innovation output than mature firms, thanks to a highly skilled and productive workforce (Audretsch, Kritikos and Schiersch, 2020[8]).

Labour productivity by firm size is measured as gross value added at current prices per person employed. Labour input is measured as total employment, which includes employees and all other paid or unpaid persons. Data on hours worked by all persons employed are typically not available by firm size.

Value added and total employment for different firm size are sourced from OECD Structural and Demographic Business Statistics (database). They typically do not perfectly align with the corresponding estimates in national accounts. The latter include several adjustments to reflect businesses and activities that may not be covered by structural business statistics, such as the non-observed economy. Since labour input is measured as total employment, the cross-country comparability of labour productivity measures by firm size may also be affected by differences in the share of part-time employment.

In this chapter, “business economy” covers mining and quarrying (B), manufacturing (C), electricity, gas, steam and air conditioning supply (D), water supply, sewerage, waste management and remediation activities (E), construction (F) and business services (excluding finance and insurance activities). Business services include wholesale and retail trade, repair of motor vehicles and motorcycles (G); transportation and storage (H); accommodation and food services (I); information and communication services (J); real estate activities (L); and professional, scientific, administrative and support activities (M and N) (letters between brackets correspond to the industry codes in ISIC rev. 4).

OECD Structural and Demographic Business Statistics (database), https://doi.org/10.1787/sdbs-data-en.

References and further reading

[8] Audretsch, D., A. Kritikos and A. Schiersch (2020), “Microfirms and Innovation in the Service Sector”, Small Business Economics, 55, 997-1018.

[5] Criscuolo, C. et al. (2021), “The human side of productivity: Uncovering the role of skills and diversity for firm productivity”, OECD Productivity Working Papers, No. 29, OECD Publishing, Paris, https://doi.org/10.1787/5f391ba9-en.

[3] Criscuolo, C., P. Gal and C. Menon (2016), “Do micro start-ups fuel job creation? Cross-country evidence from the DynEmp Express database”, Small Business Economics, Vol. 48/2, pp. 393-412, https://doi.org/10.1007/s11187-016-9778-x.

[2] Kolev, J. et al. (2022), Of Academics and Creative Destruction: Startup Advantage in the Process of Innovation, National Bureau of Economic Research, Cambridge, MA, https://doi.org/10.3386/w30362.

[1] OECD (2023), OECD SME and Entrepreneurship Outlook 2023, OECD Publishing, Paris, https://doi.org/10.1787/342b8564-en.

[6] OECD (2022), OECD Economic Surveys: Ireland 2022, OECD Publishing, Paris, https://doi.org/10.1787/46a6ea85-en.

[7] OECD (2022), OECD Economic Surveys: Korea 2022, OECD Publishing, Paris, https://doi.org/10.1787/20bf3d6e-en.

[4] OECD (2021), Understanding Firm Growth: Helping SMEs Scale Up, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/fc60b04c-en.

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