American Journal of Industrial and Business Management, 2013, 3, 255-261 255 http://dx.doi.org/10.4236/ajibm.2013.33031 Published Online July 2013 (http://www.scirp.org/journal/ajibm) Determinants of Economies of Scale in Large Businesses—A Survey on UE Listed Firms Massimiliano Celli Faculty of Economics, Department of Management and Law, Roma TRE University, Rome, Italy. Email: [email protected] Received May 14th, 2013; revised June 14th, 2013; accepted June 24th, 2013 Copyright © 2013 Massimiliano Celli. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. ABSTRACT This article aims at giving a contribution to the issue of the determinants of economies of scale in large businesses. Af- ter the economies of scale definition, the study identifies and analyzes the economies of cost that, according to most of the well-established literature, contribute jointly to originate the phenomenon at stake. Then, the study analyzes the in- formation collected through specially created questionnaires from a sample of businesses listed on regulated European markets. The aim of the questionnaires is to verify if such companies obtain economies of scale in their productive processes and, if so, to identify which of the cost economies previously analyzed are actually achieved. Finally, the arti- cle analyzes data and information obtained through the questionnaires and draws some conclusions. Specifically, the study tries to overcome a one-way and sole interpretation of the economies of scale phenomenon in favour of distinc- tion in economies of scale of II level (“in the strict sense”) and economies of scale of I level (“generic”). Keywords: Economies of Scale; Big Enterprises; Competitiveness 1. Introduction produced in the time unit [2]. Or, they may also describe the economic advantages that show when higher volumes The size and structure of businesses change over time as of output are produced with respect to smaller ones and they try to constantly adjust to the size, nature and char- that result in cost reduction per unit for that particular acteristics of the markets they interact with. In order to output, and for the same price of inputs [3]. compensate for the “natural selection” processes that in- Economies of scale are expressed by the following: evitably lead to the elimination of marginal individuals, 2c(q) > c(2q), where c(q) is the cost per unit of output that is of those units which are unable to produce a given and c(2q) the cost of double the output. Broadly speaking, amount of output at minimal absolute costs, and in order economies of scale occur when all other things being to survive in the long term, a firm needs to organize its equal, increasing outputs lead to a less than proportional operational processes in terms of both technical and eco- increase in overall costs (that is, output costs per unit nomic efficiency, that is, it has to maximize the output of decrease). Or, when increasing production costs in con- factors in the production cycle. In fact, the growth in size stant proportion result in a more than proportional output obtained either by its own force or by merging with other [4]. firms, is often motivated by the search for scale econo- In Section 2 of this article, we identify and analyze the mies. Such economies are by nature a “dynamic” phe- economies of cost that, according to most of the well- nomenon resulting from a process of growth in the firm established literature, contribute jointly to originate scale size that continues in time. Consequently, economies of economies. In Section 3, we analyze the information col- scale need to be planned over a long-term time horizon lected through specially created questionnaires from a (that is a sequence of short periods of time close to each sample of businesses listed on regulated European mar- other and characterized by a given level of productivity kets. The aim of the questionnaires is to verify if such and fixed overheads) [1]. companies obtain economies of scale in their productive Scale economies consist of potential reductions of av- processes and, if so, to identify which of the cost econo- erage costs associated with higher levels of productivity, mies analyzed in Section 2 of this article are actually which is measured by the quantity of output that can be achieved. In Section 4, we analyze data and information Copyright © 2013 SciRes. AJIBM 256 Determinants of Economies of Scale in Large Businesses. A Survey on UE Listed Firms obtained through the questionnaires and draw some con- them suitable for recycling. In other words, it is not so clusions. much a matter of developing procedures to recycle pro- duction waste, which is technically a relatively easy 2. Origins of Economies of Scale process, but of making such “changes” economically convenient or at least affordable for the business. a) Full capacity economies [5-7] When its productive capacity expands, a business is The origins of full capacity economies (also called able to cover the costs it incurs to recycle and reuse by- economies of expansion) [8,9] are to be found in the products (since costs can be distributed on a greater higher or lower levels of indivisibility of factors of pro- number of end products) as well as to save the money duction, which cannot be acquired on the supplying mar- kets in infinitely divisible fractions, either bigger or necessary for their disposal on the one hand, and on the smaller [10,11]. Businesses are very seldom able to tailor other hand to benefit from any income derived from sell- their productive capacity to the precise and actual level ing them. of market demand. c) Economies of massed reserves [14-16] In other words, if a given physical capital is available Any businesses and industrial businesses in particular to produce a given output requested by the market, it is have to create and keep a certain amount of stock over likely that businesses will not be able to supply the fac- time, both the traditional type, such as spare parts, end tors of production having the exact productive capacity products etc. and pecuniary reserves to ensure ordinary asked for. More realistically, the physical capital “avail- productive activity and reduce the risk of slowing down able” will be smaller (resulting in the under sizing of or stopping the activity itself due to the stock out of such production capacity) or greater (resulting in the over siz- factors of production. ing of production capacity) than the specific market de- In order to build and keep such reserves businesses mand. In the first case, saturation of installed physical incur in relatively high expenses which are determined capital will occur (and consequently product cost per unit not only by the relevant acquisition costs but also by the is minimized, with fixed costs of the structure distributed opportunity cost, that is the profit that the business could over the highest quantity of output possible), as well as have made if the money invested to purchase such re- impossibility to meet the overall market demand. In the serves had been used for more profitable investments. second case, under-utilization of the existing production Since cost of reserves indirectly affects the product cost capacity will take place and product costs per unit will go per unit, it is clear that handling stocks in such a way as up accordingly, since fixed costs of the structure are dis- to minimize their size is a fundamental source of com- tributed on a lesser output than the maximum technical petitive advantage. level possible. Since volumes of production and, consequently, the Moreover, full capacity economies correspond to the business size increases in a less than proportional way, efficiency improvements that businesses obtain when, costs associated with stocking and maintenance of inputs given a certain physical capital in a given period of time not immediately used in the productive activity increase (a short period interval), its use is increased until the by a less than proportional way. A larger business is able maximum technical level possible is approached, so that in fact to use such reserves in a more economical way fixed costs of the structure are distributed on a higher (the so called increasing stochastic outputs) by improving quantity of final goods (with consequent reduction of the distribution of the above mentioned technical risks product cost per unit). and therefore by reducing of the incidence of costs asso- b) Economies that recycle by-products and manufacturing ciated to such risks-over a higher number of productive waste [12,13] operations. Since the aim of reserves is to “insure” the In addition to primary products, that is the target goods business against statistically probable events likely to of the business activity, industrial businesses produce undermine proper production activity, the amount of by-products and/or waste during most of the manufac- such reserves depends partly on the management ability turing processes. They are “lost” in economic and com- to produce forecast plans, but also on the occurrence of a mercial terms during the process itself (as it happens for set of accidental events (machines break down, strikes the so called heavy oil residue, obtained from the crack- etc.) that can be forecast only with great approximation. ing of petroleum products). Under this perspective, the business management based The reason for that loss is economic rather than tech- on large productive size is able to activate, according to nological (such as the use of scarcely efficient production the law of large numbers, a great deal of statistically in- plants), since recycling such residues, in order to reuse dependent events whose opposing variations balance them in the productive process, or to sell them separately, each other out and realize a form of “self insurance”.