Cost Flexibility and Firm Size: An Application to Spanish Manufacturing

Abstract

This paper examines the relationship between flexibility and the size of establishments for Spanish manufacturing industry. This relationship is examined using the Encuesta Industrial, an annual survey which provides manufacturing sectorial information for six size categories over the period 1980–92. The theoretical framework is that proposed by Mills and Schumann (1985), finding in the evidence related to technological flexibility and demand fluctuations a greater capacity of small firms to adapt to environmental changes, allowing them, in addition, to resist competition based on costs, such as that stemming from scale economies. The results emerging from the estimations confirm that small establishments show greater production variability, employment variability and profit variability than large establishments. That is to say, small establishments are more flexible than large ones due to their greater capacity to absorb demand fluctuations.

Key Words:

• Firm Flexibility
• Technological Diversity
• Demand Fluctuations

JEL Classifications:

• L11
• M21

Notes

1. Some empirical studies in this field include Caves and Pugel (1980), Scherer (1980), White (1982), Acs and Audrestch (1990a), Velazquez (1991) and Fariñas et al. (1992).

2. Other concepts of flexibility following Stigler’s view are found in Julien (1993).

3. Levy and Powell (1998) argue that outsourcing is a popular resource for large firms, although traditionally, small firms have also relied on external firms for their necessities related to information systems.

4. This result is obtained from the expression of the first and the second derivative of cost function: .

5. This is the method used by MS. In Villalba (2002), production variability has also been calculated following Das et al.’s (1993) method where production variability is the standard error of the residuals estimated in the regression of average real production of each sectorial size category on a constant term and a line time trend in relation to the mean value of average real production of each size category in the considered period. Fariñas and Martin (2001) approach production variability through the standard deviation of the variation rate of real production of each firm for each one of the periods that they consider.

6. In Villalba (2002) employment variability has also been calculated following Das et al.’s (1993) method where employment variability is the quotient between the standard error of the residuals estimated in the regression of average employment of each sectorial size category on a constant term and a line time trend and the arithmetic mean of average employment of each sectorial size category in the considered period.

7. Gross margin of operation is frequently used in studies on the industrial economy as a measure of profitability despite the usual problems like imputing personnel cost properly in each size‐strata of establisments.

8. The detailed explanation concerning the construction of this variable is found in Martín (1990).

9. In Villalba (2002), a detailed examination of the purifications carried out is presented.

10. In Villalba (2002), the results obtained in the estimate of the specifications (1) and (2) with the inclusion of the mentioned sectors are shown. Comparing the results with those presented in this paper, it may be observed that there are no significant changes.

11. The estimates have been carried out with the program Time Series Processor (TSP), version 4.3.

12. Table AI included in the Annex presents a comparison of the results obtained in this paper with those from other studies on the same subject.

Additional information

Notes on contributors

Nuria Villalba Villalba

The author is particularly grateful to José Carlos Fariñas for his excellent direction. I would like to thank José Antonio Alonso, Álvaro Anchuelo, Álvaro Cuervo, Emilio Huerta, Rafael Myro and anonymous referees of this journal for their helpful comments and suggestions. An earlier version of this paper was presented at the IV Encuentro de Economía Aplicada in Reus.