Academic journal article Indian Journal of Industrial Relations

Scale Effect versus Young's 'Acceleration Principle': The Empirical Issues

Academic journal article Indian Journal of Industrial Relations

Scale Effect versus Young's 'Acceleration Principle': The Empirical Issues

Article excerpt

This paper maintains that the conceptualization of a large firm that is based on the realization of increasing returns to scale phenomenon, which is based on pecuniary external economies created by other such large firms, is problematic. It, by design, is dependent on the external increase in the size of the market. An alternative is the Youngian conception of the 'increasing returns' phenomenon that provides a better policy focus. It discusses the conditions under which investment by a 'large firm' in an industry that is productive (i.e. embodies technological improvement) creates external economies, and forms the basis of further investments that are more productive. The Youngian external economies-based 'acceleration' principle propagates in a cumulative way, permitting in turn continuous advanced growth.

Introduction

One of the initiatives of a liberalization process is the provision of proper incentives to make the firms more dynamic. The expectation is that this transition would bring in more 'developed' overall growth processes and confer a developed status to the economy. This is an important thrust area. Here, the Schumpeterian tradition suggests that intense competition defines such firms who rely on technological improvements as a competitive strategic conduct. In this, there is no role of normal profits. The firms are driven by the desire to increase (maintain) higher profits and their technological improvements support such objectives.

In this context, the present paper holds that the conceptualization of dynamic firms is an important policy concern; in a way, the basic Schumpeterian insight into the role of higher profits (as such) prompts two different types. One is the profitable firms who take advantage of higher scale economies and the other is the ones who seek higher profits through industrial differentiations, as discussed by Young (1928), where production processes are sub divided into many tasks and different firms of different size carry out such tasks.

This distinction is important if the 'competitive' environment that supports higher growth prospects is a concern. Chandra and Sandilands (2005) note that the recent endogenous growth literature gives more importance to the increasing returns to scale that glorifies monopoly profits, rationalized by the incidence of higher fixed costs, and it undermines the growth inducing competitive forces that are generated by the Youngian industrial differentiation. The present paper goes further to underline the need for the elaboration (see I below) that the very conceptualization of a growth process based on scale economies (and monopoly elements) is a problematic one, as borne by the fact that technological progress does not co-exist with monopoly profits.

There is another important motive at play. If there is the discussion of a link between the working of the dynamic firms and the growth of aggregate output (or technological progress), the minimal assumption is that the firms create external economies. Different conceptualizations of dynamic firms provide different conceptualizations of the economies. The present paper tries to show that their specificity in the context of scale economies is such that the scale adjusts to higher growth of output (and demand), rather than being the cause of growth. On the other hand, in the context of industrial differentiation, their discussion (as in Young, 1928) provides the understanding of how more productive investment (that aim at higher profits) creates external economies and begets further such opportunities and this 'acceleration' principle is responsible for higher growth that is associated with technological progress.

The issues raised above are taken up in Section I of the present paper. Section II deals with the empirical issues to distinguish the different conceptions of dynamic firms and Section III provides the related data set for the Indian industry, to conclude. …

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