This paper studies the importance of establishment size for the German/US labour‐productivity gap in manufacturing at the start of the twentieth century. First, we show that the left tail of the employment distribution by establishment size was larger in Germany than in the USA. Second, using US state data for 1909, we find a positive correlation between establishment size and labour productivity. Third, imposing the coefficients of these estimates on establishment‐size differences between Germany and the USA, we calculate that a redistribution of German employment to larger establishments, as in the USA, reduces the labour‐productivity gap by about 25 per cent.