Factor Substitution, Average Firm Size and Economic Growth

This paper extends the Lucas (1978, "The Bell Journal of Economics" 9(2), 508-523) analysis of firm size by taking into account a normalised aggregate CES production function. In a general equilibrium framework it is proved that there is an inverse relation between the elasticity of substi...

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Bibliographic Details
Published in:Small business economics 2006-04, Vol.26 (3), p.203-214
Main Authors: Aquilina, Matteo, Klump, Rainer, Pietrobelli, Carlo
Format: Article
Language:English
Subjects:
Business economics
Correlation analysis
Developing countries
Economic development
Economic elasticity
Economic growth
Economic growth models
Economic growth theories
Economic models
Economic theory
Economics
Elasticity
Elasticity of demand
Empirical evidence
Entrepreneurs
Equilibrium
Factor substitution
General economic equilibrium
Growth models
Income shares
Industrialized nations
Innovations
LDCs
Liberalization
Neoclassical economics
Production functions
Size of enterprise
Small & medium sized enterprises-SME
Stock shares
Studies
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Summary:This paper extends the Lucas (1978, "The Bell Journal of Economics" 9(2), 508-523) analysis of firm size by taking into account a normalised aggregate CES production function. In a general equilibrium framework it is proved that there is an inverse relation between the elasticity of substitution and average firm size. If interpreted together with the fact that richer countries are characterised by a higher elasticity of substitution, this result can explain why the recent literature finds a positive association between the importance of SMEs in an economy and its stage of development, but seems to fail in finding causality between the two. Both have a common origin: a high value of the elasticity of substitution. This paper also provides a first empirical test of the theory proposed using crosscountry data from both developed and developing countries.
ISSN:0921-898X
1573-0913
DOI:10.1007/s11187-005-4715-4