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Are SMEs less efficient? A Bayesian approach to addressing heterogeneity across firms

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Abstract

Empirical evidence shows that large firms are generally more efficient than small and medium-sized firms. Empirical tests have evaluated cost efficiency while assuming homogeneity among firms and mainly examined the size-efficiency relationship in a hypothetical average firm. However, in practice, firms have different resources for multiple reasons and are therefore heterogeneous. This paper uses the concept of profit efficiency to study size-efficiency relationships in individual firms while assuming heterogeneity among firms. For this purpose and in contrast to the traditional approach, we estimate a stochastic frontier model with random coefficients using Bayesian techniques to assess the differences in profit efficiency between small and large firms in the manufacturing industry in Spain. The results show that the relationship between efficiency and size heavily depends on the internal properties and characteristics of the firm and environment in which it operates and that there is heterogeneity among firms; ignoring such heterogeneity can lead to an overestimation of inefficiency of 4.92 percentage points. We also discuss the implications of these results.

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Availability of data and material

The data supporting the findings of this study are available from the Iberian Balance Sheet Analysis System (SABI) at https://sabi.bvdinfo.com/version-2020417/home.serv?product=sabineo. All study data are available upon request.

Notes

  1. In Europe, it is estimated that 97% of all enterprises are SMEs.

  2. In this regard, Yang and Chen (2007) indicate that there may be incentives for LEs to be less efficient in their use of resources when operating in monopolistic environments.

  3. For a technical discussion of the MCMC approach, see Gelman, Carlin, Stern and Rubin (2004); Gilks, Richardson and Spiegelhalter (1996) and Huang (2004).

  4. The model convergence and the behaviour of MCMC were checked using autocorrelation functions. The convergence results are available on request.

  5. Of the total sample, 54.05% are small firms, 35.15% are medium-sized firms and 10.80% are large firms.

  6. For further technical details on this procedure, see Bos and Koetter (2011).

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Acknowledgements

The authors wish to thanks the comments of the Editor and the two anonymous referees.

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Authors and Affiliations

  1. Department of Management, Facultad de Economía, Empresa y Turismo, IUDE, Universidad de La Laguna, Apartado 456, 38200, La Laguna, Tenerife, Spain

    Antonio Arbelo & Marta Arbelo-Pérez

  2. Department of Accounting and Finance, Facultad de Economía, Empresa y Turismo, IUDE, Universidad de La Laguna, Apartado 456, 38200, La Laguna, Tenerife, Spain

    Pilar Pérez-Gómez

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  1. Antonio Arbelo
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Correspondence to Antonio Arbelo.

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The estimation was performed using WinBUGS 14 statistical software.

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Arbelo, A., Arbelo-Pérez, M. & Pérez-Gómez, P. Are SMEs less efficient? A Bayesian approach to addressing heterogeneity across firms. Small Bus Econ 58, 1915–1929 (2022). https://doi.org/10.1007/s11187-021-00489-2

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