Business groups’ internal labour markets and SME labour productivity

Small Bus Econ https://doi.org/10.1007/s11187-023-00780-4 RESEARCH ARTICLE Business groups’ internal labour markets and SME labour productivity Pablo Doucet · Ignacio Requejo · Isabel Suárez‑González Accepted: 24 April 2023 © The Author(s) 2023 Abstract Labour market regulation constrains small and medium-sized enterprises’ (SMEs) ability to minimize redundant labour. However, it is often neglected that many SMEs might circumvent these constraints by accessing a business group’s internal labour market (ILM). In this study, we analyse whether SMEs with ILM access—i.e., with an increasing number of sister group companies in the same subnational region-industry—enjoy a labour productivity premium and whether this potential productivity premium depends on the bargaining power of labour. Because intra-group reallocation of redundant personnel often involves substantial changes in employment conditions, we argue that the value of ILM access might be reduced when the bargaining power of workers is high as they can oppose the reallocation or demand significant compensation. Using a panel of 119,801 European SMEs during 2011–2019 (639,675 firm-year observations), we find that SMEs with ILM access show relatively higher Supplementary Information The online version contains supplementary material available at https://doi. org/10.1007/s11187-023-00780-4. P. Doucet (*) · I. Requejo · I. Suárez‑González IME and Business Administration Department, Universidad de Salamanca, Campus Miguel de Unamuno, S/N, 37007 Salamanca, Spain e-mail: I. Requejo e-mail: I. Suárez‑González e-mail: labour productivity. Further, our findings suggest that this productivity premium is higher in those contexts associated with lower labour bargaining power. Plain English Summary Intra-group reallocation of unused labour can enhance SME labour productivity, but its feasibility and value-adding potential depend on labour bargaining power. This article explores differences in SME labour productivity attributed to internal labour market access, that is, the flexibility to reallocate unproductive labour to other sister companies in the group network. We also analyse if any potential productivity premium associated with internal labour market access depends on the bargaining power of labour. Our statistical analysis shows a labour productivity premium associated with internal labour market access. Furthermore, it is especially significant in contexts associated with low employee bargaining power. For instance, when collective bargaining coverage is low (very low) we predict a labour productivity premium of 3.3% (4.5%) for all SMEs embedded in a network of 10 companies in the same region-industry. Thus, our study contributes to sharpening our understanding of SME productivity and the value they receive from group affiliation. Keywords Business groups · SMEs · Internal labour markets · Bargaining power · Labour productivity JEL Classification L22 · L25 · M51 · J21 Vol.: (0123456789) 13 P. Doucet et al. 1 Introduction Dismissal costs cause small and medium-sized enterprises (SMEs) to keep underutilized labour (Caballero et al., 2013; Mallett et al., 2019; Van Landuyt et al., 2017). However, it is largely ignored that many SMEs can circumvent these costs by reallocating excess personnel through a business group’s internal labour market (ILM). A business group can be defined as a set of legally independent firms linked together via ownership ties (Cainelli & Iacobucci, 2011). The literature on business groups has mostly focused on how business groups can add value to their members by functioning as internal capital markets (e.g., Belenzon et al., 2013; Boutin et al., 2013; Kabbach-de-Castro et al., 2022). Little is known though about the benefits of articulating ILMs. Furthermore, the focus of the few existing studies is large corporations (Faccio & O’Brien, 2021; Jung et al., 2019), thus neglecting that many SMEs may benefit from ILM access. Therefore, it is relevant to investigate the value-added of ILM access for SMEs given that (1) they are particularly constrained in adjusting labour on changing opportunities (Williamson, 2000), and because (2) business groups are also ubiquitous in the small business sector (Iacobucci & Rosa, 2005, 2010; Lechner & Leyronas, 2009). Moreover, previous research does not consider the role of the bargaining power of labour in the feasibility and value-added of ILM access. Anecdotal evidence suggests that reallocation of redundant workers across firms of the same business group often involves substantial changes in employment conditions: employees might learn new skills, lose power within the organization, and see their employment, effort, and pay levels on less favourable terms (Capron & Guillén, 2009; MacKenzie & McLachlan, 2022). This suggests that employee bargaining power might be key in the value-added potential of ILMs. The aim of this paper is twofold. First, we analyse whether SMEs with ILM access enjoy a labour productivity premium. Second, we investigate whether any potential productivity premium associated with ILM access depends on employee bargaining power. To empirically test these ideas, we collect a sample of 119,801 SMEs (639,675 firm-year observations) across 208 European regions (NUTS 2) covering 21 Vol:. (1234567890) 13 European countries with available data. Our research context offers an ideal environment for our objectives for two reasons. First, European countries are characterized by an unrivalled accuracy, reliability, and comparability of cross-country SMEs data. Second, it allows us to observe a high level of heterogeneity in the bargaining power of workers, varying across countries, subnational regions, and industries. Our findings reveal that firms with ILM access have relative higher labour productivity than firms without ILM access. For example, when the average SME is embedded in a network (same subnational region-industry) composed of 10 (20) group firms, its labour productivity increases by 1.5% (3.5%) compared with SMEs without ILM access. In addition, we find that this productivity premium is higher in contexts associated with less employee bargaining power. Specifically, (1) in countries with more permissive labour laws, lower trade union density and collective bargaining power coverage; (2) in subnational regions with lower labour market tightness; and (3) in industries with lower job vacancy rates. For example, when regional labour market tightness is at the mean - 1 S.D. of its distribution—which is associated with lower employee bargaining power—, SMEs embedded in a network composed of 10 (20) group firms see their productivity increase by 3.5% (7%) (again, compared to SMEs without ILM access). These findings contribute to the literatures on small business and business groups. In the small business literature, we document that ILM access is key to understand labour productivity at the firm level. Few studies consider that many (...truncated)