Impact of New Technologies on Scale in Manufacturing Industry

* Report: The Impact of New Technologies on Scale in Manufacturing Industry: Issues and Evidence. By Ludovico Alcorta. UNU/INTECH Working Paper No. 5, June 1992

URL = http://archive.unu.edu/hq/library/Collection/PDF_files/INTECH/INTECHwp05.pdf

Contents

"The paper will proceed as follows. The next section will present a simple conceptual framework examining the relationship between technical change and unit costs and how it may lead to ’de-scaling’ or ’scaling-up’. The paper will then briefly review the literature on the nature of the technological changes that are affecting manufacturing industry. The following section will look into the question of whether NT are ’de-scaling’. It will do so by examining the arguments put forward by ’de-scaling’ authors, as well as the empirical evidence supporting those views. It will focus on the relationship between costs and technological change in each dimension of scale. Inter-industry differences will try to be accounted for. In a fifth section, some other options that NT allegedly open for small firms will be discussed, namely the possibilities of producing in ’new’ industries and of networking. The paper will end with some comments on the impact of NT on the potential for development of small-scale firms."

Excerpts

From the introduction:

"Developments in the fields of microelectronic, information and organisation technologies have led to a host of innovations which seem to be radically changing the nature of manufacturing industry. The increasing replacement of mass production, specialised, single-purpose, fixed equipment by computer aided design and engineering capabilities (CAD/CAE), robots, automatic handling and transporting devices, flexible manufacturing systems (FMS), computer aided/integrated manufacturing (CAM/CIM), cellular manufacturing, just-in-time (JIT) techniques, materials resource planning (MRP) and telematics has allowed firms to produce a larger variety of outputs efficiently in smaller batches and less time. The greater flexibility of new technologies (NT) is also believed to have important implications for the level of ’optimal’ scales. Contrary to the previous ’mass production’ technological paradigm where increasing scales were crucial to cost reductions, NT’s flexibility is said to provide "opportunities to switch production between products and so reverse the tendency towards greater scale" (Kaplinsky, 1990a, pg. 154). A similar view is put forward by Acs et al (1990), who argue that flexible production means that the "optimal size of plant and firm declines and entry occurs by small-scale-flexible producers" (pg. 146). This ’de-scaling’ view is shared by a large proportion of the economics, management and engineering literature that focuses on the impact of recent technical change on scale in manufacturing production.

’De-scaling’ in manufacturing industry could have at least five important related consequences for smaller scale firms and industrialisation.

First, it would increase the efficiency of small-scale production (Dosi, 1988).

Second, it may decrease the importance of plant-related economies of scale that were the source of productivity growth before NT were introduced (Dosi, 1988).

Third, insofar as scale is a barrier to entry to other firms (Bain, 1956), more entry and competition by smaller firms could be expected. Furthermore, it could reduce barriers to entry in international trade in some sectors and facilitate the establishment of national industries where it was previously not feasible.

Fourth, it may ease the ’infant industry’ process that has complicated industrialisation in many developing countries (United Nations University, 1987). Smaller scales may allow for a more widespread impact of the various forms of learning associated with experience and of the ’externalities’ resulting from the acquisition and use of new knowledge.

Finally, it is likely to reduce the importance of ’world factories’ producing on a global scale and therefore change the pattern of location of industry (Kaplinsky, 1990a). It could pave the way to new patterns of decentralised industrialisation based on small production units located outside the large urban centres (United Nations University, 1987).

The potential impact of ’de-scaling’ on plants, firms, industries, and countries clearly warrants careful examination of the issues involved. Accordingly, the main aim of this paper is to examine critically the literature on the relationship between NT and scale. It will address the question of whether and to what extent NT reduce the optimal scale of production units, a phenomenon we shall describe as ’de-scaling’. Insofar as optimal scale may take place at different dimensions: product (batch size), plant (total plant output), and firm (total firm production), and that each one could be affected differently by technology, the discussion will be done separately for each of these levels.

The main argument will be that, although NT may have a significant scale reduction effect at product level, it is not clear they would have a similar impact at plant level.

Furthermore, the impact at firm level may be ’scaling-up’ rather than ’de-scaling’.

Although the overall impact of NT on scale is very difficult to gauge at this stage, as some of the newest technologies have not completely ’diffused’ and little research has been done on the topic, it seems that the trend, if any, will be towards larger firms and organisations rather than smaller ones. This statement, however, does not mean that smaller firms are doomed nor that opportunities are totally closed for them. Small firms will continue to emerge, as they have always done, catering for specialised markets or by selling service-linked products. NT will offer small firms the possibility to improve quality standards and to coordinate and share fixed costs."