Firm environment and size
Firm environment and size

Summary/Abstract: This article contributes to the ongoing debate on the linkages between the industry in which a firm operates, its strategy and performance. Unlike other authors, we analyse the impact that the general business environment has on the size of firms. Firstly, we outline the theoretical propositions concerning the relationship between firm size and its external environment. Secondly, we empirically test the impact of the identified aspects of firm environment on its size. Based on 278 observations on the average firm size in manufacturing and distributive trades across Western Europe over 1999 – 2008, we find empirical support for the hypothesis stating that the external environment of the firm affects its size and that adverse environment leads to subdued firm sizes. Overall, we find that the time variation of the external environment of the firm is responsible for nearly all of the variability in its average size. In the case of manufacturing industries, we find that increases to the cost of capital and labour, but also to their supply, as well as the level of governmental regulation, all negatively affect the average firm size. While in the case of enterprises operating in the distributive trades, the cost of capital seems to have no bearing on the changes in the average firm size, unlike its availability. Moreover, for the latter group, increases in labour costs result in larger firm sizes, and growth in unemployment leads to on average smaller firms.

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