Does firm size matter? Decomposing Korean firms’ productivity growth based on a stochastic frontier approach and its policy implications

Abstract

ABSTRACT Despite the significance of transition in the growth stages, there is a lack of evidence on the different characteristics of firm size in terms of the sources of TFP growth. This study applies a stochastic frontier analysis to Korean firms to decompose the sources of total factor productivity growth into technical progress, technical efficiency changes, scale changes and allocative efficiency changes. Specifically, this study analyses the determinants of TFP growth by firm size (i.e. small-, mid- and large-sized firms) and explores firm-size-specific factors that influence their productivity growth rates. Our results suggest that contributions of four components to TFP growth by firm-size classes show somewhat different patterns. These results imply that each class has different sets of challenges in terms of improving productivity growth potentials. The main findings are expected to lay foundations for designing elaborate firm-size-dependent policies to spur the evolutionary process of a firm’s capacity building.