Download Intro. To Industrial Economics

Intro. To Industrial Economics
Birth of a Firm:
-Entrepreneurs take the risk of bringing together factors of
production (land, labour, capital)
-What to they need? Finance!!! (either lots of start-up capital
or quick establishment of cash-flow
Growth of a Firm:
-From concept to ultimate success, a firm needs to grow
-This can be achieved using a variety of methods (merging,
buying out competitors, expanding production, selling into
new markets, expanding product range, etc.)
Why do firms want to grow?
1. Economies of Scale:
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Larger output may enable use of new
costly technology
More effective division of labour
More bulk buying advantages
Better finance opportunities
Why do firms want to grow?
2.
Motivation of the owners / directors
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Larger market share may give the firm greater power
to set price (higher profits?)
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Large firms tend to pay managers higher salaries
than smaller firms
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Some entrepreneurs / managers are motivated by
the idea of running a very large successful firm
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Successful record of high growth adds to
qualification of managers when seeking other
positions in even larger, more prestigious companies
Internal Growth
• Expanded production from within the
company
• Financed through retained profits, debt,
stock market listing
• Usually a relatively slow, gradual process
External Growth
Mergers allow firms to grow by joining with
another firm to form a single firm.
(Sometimes “acquisitions” are hostile, others
are friendly.)
Horizontal Integration:
•A company merges with another at the
same stage of the production process
Eg. greeting card manufacturer merges with
another greeting card manufacturer
External Growth Cont’
Vertical Integration:
- A firm merges with one at a different stage
in the production process within the same
industry
Eg. greeting card manufacturer buys a high
street card shop chain (forward) OR a
paper manufacturer (backward)
- Forward is closer to the final customer
- Backward is closer to the primary resource
External Growth Cont’
Conglomerate Integration:
•A firm merges with another firm in an unrelated industry
•Allows the firm to diversify against risk (many industries
covered)
Multinationals:
•MNC are playing an increasingly important role in the
international economy
•Can increase foreign direct investment in other
economies leading to improved living standards, etc.
•But drawbacks include a country becoming dependent
on them, gov’t spending large sums “wooing” them,
bullying of economic agents, etc.