Dynamic market selection in EU business services

We use a DEA method to construct the productivity frontier by sub-sector and size class, for business services in 13 EU countries. From this we derive scale economies and their development over time. Between 1999 and 2005 we observe a persistence of scale inefficiencies and X-inefficiencies, with scale efficiency falling rather than growing over time. This indicates malfunctioning competitive selection.

The time pattern of inefficiencies is significantly explained by regulatory policies that hamper entry and exit dynamics and labour adjustment, and by a lack of import penetration. The results suggest that policy reform and more market openness may have positive productivity effects. This holds for business services itself, but also wider, because of business services’ large role in intermediary production inputs.