contrast, the employees of smaller firms may be more motivated by competitive-based incentive
schemes rather than financial ones (Agell, 2004), thus possibly making them more efficient
(profitable) to the firm. These hypotheses have been extensively tested in the literature. For
instance, Gumbau-Albert and Maudos (2002), using a panel of 1,149 Spanish firms from 18
manufacturing industries, arrived at the conclusion that firm size is conducive to efficiency.
Torii (1992) claimed that the efficiency can be positively related to the scale or size of a firm
if it is assumed that maintaining or improving efficiency incurs costs in terms of the firm’s
management because larger firms tend to be less resource constrained.
Hypothesis 4 Outsourcing activities and R&D enhance the productive efficiency of a firm.
Grossman and Helpman (2005) emphasize that “. . . firms seem to be subcontracting an ever
expanding set of activities, ranging from product design to assembly, from research and devel-
opment to marketing, distribution, and after-sales service.” A number of studies find that a high
level of outsourcing has a positive effect on efficiency, but some studies state that the positive
role of outsourcing is often overestimated (Heshmati, 2003). The relationship between produc-
tive efficiency and R&D investment is also ambiguous (Bartelsman and Doms, 2000). Some
researchers have confirmed a positive relationship between R&D and efficiency (see Ornaghi,
2006, and the references therein), but others (see, e.g., Albach, 1980; Caves and Barton, 1990)
find that R&D intensity has a negative impact on productive efficiency. In an attempt to explain
this negative, effect Caves and Barton (1990, p. 76) hypothesize that the R&D expenditures of
an industry are only a poor predictor of that industry’s innovativeness because a large part of
the innovation output will be applied in other industries. Additionally, investment in R&D is by
its very nature risky and will pay off, if it even does, at a considerable time lag.
Hypothesis 5 The average productivity level of all firms increases over time, whereas the av-
erage relative efficiency level remains constant.
It can be expected that technical progress will yield productivity improvements over time.
Moreover, it is commonly accepted in economics that competition will result in an efficient use
of scarce resources. Competition is a very powerful mechanism that provides incentives for an
efficient organization of production. Competition will force inefficient firms to leave the market,
thereby increasing the average productivity level in the industry. If markets are predominantly
competitive, the firms’ average productivity level is expected to increase over time. However, in
contrast to productivity, the average efficiency of firms, which is measured relative to the most
efficient firm(s), is hypothesized to remain constant over time.