Abstract
This study applies a stochastic frontier model to examine the relationship between firm size and efficiency using a novel approach. The first novelty is that this study examines large and small firms separately to allow for heterogeneity between firm group sizes in terms of measuring the size-efficiency relationship. The second is that we use a modified frontier model which explicitly includes a family firm variable when measuring firm efficiency. Empirical results reveal that firms are in fact heterogeneous, with small- and medium-sized enterprises (SMEs) exhibiting a U-shaped scale efficiency curve, while large enterprises (LE) exhibit an efficiency curve which is positive and linear. Robust results also confirm that family firms are relatively more efficient than non-family firms. In addition, while controlling for family firms does not appear to change the firm’s size-efficiency dynamics, failure to control for family firms leads to a bias in characterizing the nature of the firm’s production returns to scale.
Plain English Summary
This study reveals that with scale expansion, firm efficiency dynamics vary depending on firm size. Empirical results show that SMEs go through an initial stage of efficiency loss and then rebound, exhibiting a U-shaped efficiency curve, while for LEs, the effect is linear with a slightly positive slope as firm efficiency increases slowly and steadily. Findings suggest that there are implications for entrepreneurship policy, as the important role of family firms in increasing firm production efficiency is revealed. There are also important implications for small business research, as results show that failure to control for family effects in the efficiency model can cause misjudgement in characterizing production as increasing in returns to scale rather than decreasing returns to scale.
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Data Availability
The data for this study were accessed under license from the Directorate-General of Budget, Accounting, and Statistics (DGBAS) Executive Yuan of Taiwan. As such, restrictions may apply to the availability of these data and are not considered publicly available.
Notes
For a review of earlier efficiency studies see Yang & Chen, (2009). Due to the size of this literature, this review excludes studies using an alternative approach such as productive or profit efficiency (Arbelo et al., (2021a, 2021b), Cowling & Tanewski, (2019), Hasan et al., (2020), Bartoloni et al., (2021) and others).
In a related study, Miralles-Marcelo et al., (2014) found that for Portugal and Spain, family firms have a positive impact on accounting performance, especially for small-scale and long-established firms.
An excellent discussion on how to define family firms can be found in Chua et al., (1999).
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Chen, KH., Chen, PH., Elston, J.A. et al. Are family firms more efficient? Revisiting the U-shaped curve of scale and efficiency. Small Bus Econ 61, 983–1008 (2023). https://doi.org/10.1007/s11187-022-00720-8
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DOI: https://doi.org/10.1007/s11187-022-00720-8