Returns to Scale Productive Efficiency and Optimal Firm Size：Evidence from Taiwan`s Firm Data

Abstract

By using Taiwan’s census firm data, this paper estimates and tests the variable returns\r\nto scale hypothesis for aggregate manufacturing and two-digit industries. An e -\r\nciency measure is constructed to further examine the size-e ciency relations among\r\ntwo-digit industries. Analysis indicates that increasing returns exist at the aggregate\r\nmanufacturing level and its magnitude is higher for exporting firms than for nonexporting firms. Moreover, trade is beneficial only for small firms. However, the\r\nproperty of increasing returns diminishes for most of the industries at the two-digit\r\nlevel, particularly for the exporting firms. This sharp comparison between aggregate\r\nand two-digit level results suggests that trade is conducive to productivity, and\r\nprovides an indication of the specific form of technology spillovers among firms and\r\nacross industries. Further investigation of the relationship between productive e -\r\nciency and firm size renders the result that optimal firm size is small for exporting\r\nfirms in most industries, particularly in the most export-oriented ones. The technology\r\nspillover e€ ect among firms and across industries is likely the reason for being small\r\nand e cient. Our results also indicate that an industry-wide spillover e€ ect across\r\nfirms within the same industry is roughly one-sixth of the firm-specific export-induced\r\nlearning e€ ect. Findings in this study provide valuable insight into Taiwan’s economic\r\ndevelopment and also provide a development strategy for developing countries to\r\nfollow.