What Drives the Productive Efficiency of a Firm?: The Importance of Industry, Location, R&D, and Size

Table 4: Names and definitions of variables

Name	Description
Environmentalfactors - Industry affiliation	Industry dummies at the 4-digit level (255 industries)
- Location	District (Kreis) of the headquarter of the enterprise (440 districts)
- Year effects	Dummy variable for each year, 1992-2005
Firm-specific factors a) Firm characteristics - Size	Six categories: less then 49 employees (= 1), 50-99 employees (= 2), 100-249 employees (= 3), 250-499 employees (= 4), 500-999 employees (= 5), more than 1000 employees (= 6)
- Share in industry	Relative production share of German suppliers in the respective industry
- R&D intensity	Share of R&D personnel over total employment (available from 1999 on)
b) Outsourcing activities - Quota of external contract work - Quota of external services	Expenditure for external contract work / internal labor cost Expenditure for external services / internal labor cost
- Quota of material inputs	Expenditure for material inputs / internal labor cost
- Quota of temporarily employed labor - Quota operating leases	Expenditure for temporary employed labor / internal labor cost; available from 1999 on Operating leasing expenses / capital depreciations; available from 1999 on
c) Ownership - Type of business - Number of owners working in the firm	Manufacturing (= 1) / craft (= 0) dummy variable Number of owners working in the firm

Second, the results suggest that efficiency is largely explained by the industry in which the
firm is operating. The great importance of industry effects is echoed in the literature, which
emphasizes the role of industry in explaining firm profitability (Cubbin and Geroski, 1987;
Schmalensee, 1985). These results are broadly consistent with hypothesis 1. Industry effects
might capture different degrees of competition in the respective markets (Fritsch and Stephan,
2004a) or might accrue from different stages of the industry lifecycle or different technologi-
cal regimes (Fritsch and Stephan, 2004b). The “black box” of industry effects may also have
something to do with the necessity of firms in certain industries to innovate, for example, the

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