| dc.description.abstract | What are the causes of growth of an industrial undertaking? One important cause, widely discussed in the economic literature, is the reduction in cost due to increase in size - economies of scale. Businessmen need the estimates of economic size to determine the optimum combination of the factors of production. Developing countries need the estimates to decide on the number of units to set up, what investments to plan in each sector of industry, and for policy decisions on monopolies, mergers and incentives. Studies on economies of scale are, therefore, of wide interest.
Economies of scale were studied for seven Indian manufacturing industries. Data for 1963-72 on 500 companies for seven industries, cotton spinning and weaving, cotton spinning, jute textiles, paper and pulp, sugar, cement, and aluminum were collected from the companies listed in the Bombay Stock Exchange Directory, which accounts for about B3 per cent of the total paid up capital of government and non-government public limited companies incorporated in India.
The relative ability of the firms to expand was examined to explain growth. It was hypothesized that larger the size of the firm greater was its ability to expand. Size distribution of the firm was examined over time to study the growth or the decline of the individual firms. Future size distribution were also obtained based on the past distributions.
Economies of scale and least cost size were estimated for each industry using three methods:
a) Survivorship techniques: In this method, firms which survive and contribute increasing proportion of an industry's output are considered as the least cost size. Firm with a declining share of output are deemed either too large or too small.
b) Long-run cost curve method; In this method, the long-run cost curve is estimated. Using least squares, a linear or non- linear cost—output relationship is determined. Additional variables such as the extent of vertical integration, are taken into account.
c) Size profitability method: In this method, the profitability- output relationship is estimated using least squares. The size of the most profitable unit is taken as the least cost size.
Profitability was defined in the study, as ‘profit after tax/ net assets‘ or ‘profit after tax/net worth‘, whereas size was defined as output in rupees.
In five industries, the average cost curve line 'L' shaped. Costs declined as the output increased, fast initially but slowly later, as shape of an 'L'. Firms studied had not expanded so uneconomic sizes. If they had, a 'U' shaped average cost of curve would have been formed. Least-cost sizes obtained from various methods were Compared. For example, for jute textile industry the least cost sizes, in output value at 1963 prices, from different methods are: Survivorship technique between he 9.5 crores and k. 13 crores; long-run cost curve: more; size-profitability: M. 6 crores to %. 10 crores.
Vertical integration, measured as ‘value added/output‘, was an import- ant factor in reducing the cost as size increased. In jute textile industry an increase in Vertical Integration from 0.60 to U-75. led t0 3 5 P8! Cent reduction in the average cost at k. 6 crores output level at 1963 prices. ability of the firms to expand was assessed from the distribution of profitability in each group in the industry. Those size classes which had the highest profit rate were most likely to grow from retained earnings. In all the industries studied the hypothesis that the ability to expand was greater, larger the size, was confirmed. That means there is a likely-hood of further concentration in these industries, subject, however, to government constraints.
This tendency of concentration was brought into focus by determining the long-term size patterns. If past patterns of growth continue, whet will be the stable pattern? Modeling changes in the size distribution over time, assuming a Markov Process, showed that s stable size distribution would have greatest concentration in the highest size class. For example, for cotton spinning, jute textiles, sugar, cement, and paper and pulp maximum number firms concentrated in the highest size class of %.6.4Ucrores or above of output.
The findings highlight the dilemma of government policy of more efficient larger firms vies-a-vie concentration of power, Since most of the industries had an 'L' shaped average cost curve, allowing larger firms to expand would lead to lower costs per unit of output and, hopefully, products at lower prices. On the other hand, expansion of the firms would lead to fewer firms controlling a considerable share of the market or increased concentration in product markets,
Least-cost sizes can be used as guidelines to establish new plants. Assuming existing technology, for example, the least-cost size of a firm in jute textile industry would be E. 6 crores of output at 1963 price or B. 11.6 crores of output at 1972 price.
The study was based on published financial data forcing us to define size in value terms rather than as physical unite. Each single-product firm consists of several distinct activities. The lowest average cost will be for an output equal to the lowest common multiple of these capacities of each distinct activity. These capacities can be found by studying the engineering production function. Engineering production functions are more precise in estimating the least cost size of an industry. Studies could be done using the engineering approach. However, the data required for engineering studies are hard to collect and tend to be confidential. | en |
