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: 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 Larger market share may give the firm greater power to set price (higher profits?) Large firms tend to pay managers higher salaries than smaller firms Some entrepreneurs / managers are motivated by the idea of running a very large successful firm 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.