Towards a theory of the small firm: theoretical aspects and some policy implications

Abstract There is a need to shed light on the growing role played by the small firm in local, national and global dynamic competition in order to challenge this deeply rooted lack of interest. The fact that firms have been organized successfully in ways that differ from the fordist paradigm has put the certainties, on which generations of economists have constructed their own analytical and interpretative grids and influenced industrial policy, in crisis. Thus, in the face of empirical evidence, it must be admitted that the case of the small firm can no longer be considered as a transitory phenomenon unsuitable for the attention of economic theory. Within this framework, the intention of this study is to provide the reader with points of particular interest in the light of recent developments in the theory of the firm, in industrial organization and industrial economics and policy. One of these, worth mentioning even now, is the definition of the small firm which appears to be far from homogeneous in structure, conduct and performance. Thus, this paper will attempt to single out the patterns that emerge from a descriptive and empirical body of literature which still needs to be rearranged and elaborated by means of an ad hoc theoretical structure dedicated to small firms. The paper is arranged as follows. In the first part the main theories of the firm are summarized and their limitations are discussed. In the second part the relationship between efficiency and firm size is analyzed. The third part attempts to define the concepts and the analytical tools needed for the construction of a theory of the small firm. Thus, the limitations mentioned in the previous section are discussed in relation to small firms, giving emphasis to the importance of external economies and collective efficiency. The discussion will also examine the technical and productive as well as the social and organizational aspects of the firm which, while being frequently neglected in traditional theories, are in fact extremely useful when examining the case of small firms. Thus, in a certain sense, the organizational theory of Simon and the evolutionary theory of Nelson and Winter provide points of reference for a theory of small and medium firms. The paper ends with some policy thought.