The Effect of SME Productivity Increases on Large Firm Productivity in the EU

We investigate to what extent productivity of large firms is influenced by productivity growth of small and medium-sized enterprises (SMEs). We specify an econometric model which we estimate using a data base of the European Commission for the 27 Member States of the EU for the period 2002-2008. Our main findings are as follows. First, we find evidence for a positive effect of SME labour productivity increases on labour productivity increases of large firms. Second, we find that this primarily reflects an effect of medium-sized firm productivity increases, and not so much an effect of micro or small firms. Third, these effects are considerably stronger for those EU-27 countries with relatively lower levels of economic development. Our paper has several policy implications for developed and developing countries.