Firm Size Distribution and Growth*

TLDR

Firm size distribution varies substantially across European countries. The study investigates how firm size influences industry‑level productivity growth, focusing on the role of R&D. The authors construct a test examining how size affects growth across different R&D intensity indicators. The results reveal a robust positive link between firm size and productivity growth, with larger firms benefiting from R&D returns, supporting a causal effect of size on growth.

Abstract

Abstract Empirical documentation of the sectoral distribution of firm size for a set of European countries reveals substantial differences. We study the relationship between productivity growth at the industry level and size structure. A positive and robust relation is found between average firm size and growth. We ask why size should matter for growth by considering the role of innovation to construct a test based on the differential effect of size on growth according to various indicators of R&D intensity. Our results indicate that larger size fosters productivity growth because it allows firms to take advantage of all the increasing returns associated with R&D. We argue that our test can be interpreted as a test of reverse causality, which lends support to the view that firm size has a causal impact on growth.