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Economies of Scale
As our society changes, international business follows trends dictated by those movements.
It is known that companies now have more opportunities of expansion, more capability for
productivity, new technologies that can help them in different areas, amongst other factors. With
that information in mind, it is natural that organizations adapt their strategies for international
business in order to increase profitability (rate of return) and profit growth (percentage increase in
net growth) (Hill, 2022). One of the new strategies that many organizations decide to adopt are
economies of scale, which is the reduction on unit cost by producing a larger volume of the
product.
Purpose of Research
The utilization of economies of scale can affect companies, industries and societies. By
producing more products and reducing overall unit prices, firms can change the scope of multiple
scenarios depending on the conditions. The purpose of this paper is to identify the impact of
economies of scale in different countries and sizes of companies, the efficiency of its system in
different organizations, and the role that external economies of scale can play in developing
countries.
Review of the Literature
The utilization of economies of scale will naturally have different effects depending on the
company, industry, and country that is utilized. It is important to study how efficient its
implementation can be for specific companies as that can mean the development of a sector and
therefore of society as well by increasing production and reducing costs. In a study in Norway,
Mydland et al. (2018) found that in Norwegian electricity distribution companies, there is a large
potential for economies of scale especially in smaller companies, with positive results in the
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relationships between network length and number of customers. The study also found an increase
a return to scale over time.
It is important to look at different sizes of companies and industries when discussing
economies of scale. Libraries are a billion-dollar industry in the USA and it is interesting to study
overall effects of economies of scale in such sector. Ferreira Neto et al. (2019) studies library
efficiency in West Virginia and found a direct relationship between the utilization of economies
of scale and library efficiency. The findings show that smaller urban libraries are more inefficient
because they are usually smaller and due to that they do not achieve economies of scale in
production library services, while the opposite happens in larger libraries, usually not located in
urban areas.
It is normal that different organizations and industries in developing countries end up
accepting international financial help from different parties that might have a certain interest in
that sector or firm. It might be a way for the investors to diversity their portfolio and for the
company and industry to develop and increase sales/profit. Razmi (2021) studied the effects and
the role of external economies of scale in developing economies, and the findings showed that the
presence of those external economies of scale generated multiple equilibria and multiple types of
capital flows that can generate and incentivize more investments to that economy for longer
periods of time.
Practical Application
Companies that are looking at more efficient ways to reduce costs and increase production
are probably already considering economies of scale as a possibility. However, analyzing cases
from specific sectors can help those organizations realize the potential of their operations as they
start planning those changes. At the same time, managers and higher ups of certain industries can
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look at research and see how economies of scale can be affected in the same sector according to
the size of each firm. By knowing those differences, those individuals can make more assertive
plans when forecasting productivity and profit. Finally, governments from developing countries
can make development plans for their economies knowing that external economies of scale can
generate higher investments over time.
Conclusion
Diminishing the cost of each unit of production by producing a larger volume of products
can be positive for different companies, industries, and countries. Research shows that the
utilization of economies of scale can have a positive effect in smaller electricity companies in
Norway, showing a greater return to scale over time as well (Mydland et al., 2018). Within the
same industry, studies show that smaller libraries in non-urban areas in West Virginia can be more
efficient utilizing economies of scale (Ferreira Neto et al.,2019). Finally, utilizing external
economies of scale in developing economies can help push capital and investments into those
countries.
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References
Ferreira Neto, A. B., & Hall, J. C. (2018). Economies of scale and governance of library systems:
Evidence
from
West
Virginia.
Economics
of
Governance,
20(3),
237µ3.
https://doi.org/10.1007/s10101-018-0215-2
Hill, C. W. L. (2022). Global Business Today (12th ed.). New York, NY: McGraw Hill.
Mydland, ., Haugom, E., & Lien, G. (2018). Economies of scale in Norwegian Electricity
Distribution: A quantile regression approach. Applied Economics, 50(40), 4360372.
https://doi.org/10.1080/00036846.2018.1450481
Razmi, A. (2020). Capital inflows, sustained investment surges and the role of external economies
of
scale
in
a
developing
https://doi.org/10.1111/meca.12324
economy.
Metroeconomica,
72(2),
365ø7.

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