Elasticity of substitution, returns to scale and firm size: an analysis of Kenyan data

Abstract

In this paper the author attempts a comparative analysis of different firm sizes in Kenya's industrial sector, within the prouuction function framework. It is discovered that substitution elasticities are roughly the same and uniformly greater than zero. Homogeneity parameters are about the same at the individual firm level and about unity, but at the aggregate level we witness constant returns to scale for the large firms and increasing returns to scale for the small firms. With present data, we cannot identify duality in factor prices faced by different firm sizes. Capital cost per job is lower for small firms than for large ones. On the basis of the foregoing, we can tentatively conclude that, if there is a choice between firm sizes, for most policy objectives it would be advisable to opt for the small scale firm. The most important conclusion is that firm size can be a policy instrument.