Competition, Growth and Economies of Scale in the Iron Foundry Industry of Great Britain

Abstract

In this study we examine the extent to which firms in the Ironfounding industry are adjusting to minimum efficient scale as an explanation for the changing size distribution of firms in the industry over time. A description of the industry indicates that any attempt to discover such a mechanism of change is complicated by the wide variety of foundry work undertaken in the industry. As such the possibility of an industry wide unique minimum efficient scale of firm is unlikely. Tests using the "survivor technique” indicate that there may (at least) be common scales which are below minimum efficient scale. Our method of analysis is not to pinpoint the various minimum efficient scales for foundries producing different kinds of output, but rather to follow a dynamic approach. This involves an examination of the interrelationships between competition, growth and economies of scale. A realistic approach is adopted to examine the degree of competition between firms. The size of competing groups and the size distribution of firms within competing groups are also analysed as is the relationship between the firm and its customers. Measuring economies of scale directly involves huge problems. We sidestep this issue by measuring the overall "efficiencies" of firms of differing size. Growth of firms is introduced he method through which firms adjust to minimum efficient scale. A twofold purpose is achieved through this analysis. Certain direct hypotheses relating economies of scale to the growth of the firm are tested, and in addition to this we examine the nature of this growth in order to establish the reliability of an analysis which rests on a cross-sectional approach to the problem. Finally, statistically we relate the competitive status of firms of differing size to growth and the assumed success of firms in the industry.