What accounts for the emergence of external economies of scale? Discuss with reference to two relevant empirical cases
Upon speaking about trade and development, it is reasonable to implement economies of scale into their agenda. Economies of scale theories suggest that “production is more efficient the larger the scale at which it takes place. Where there are economies of scale, doubling the inputs to an industry will more than double the industry’s production.” Furthermore, two types of economies of scale exist as theories- internal and external. However, this paper will examine external economies principles strictly and provide supported by evidence explanation as to why they emerge in the first place. What the basis of external economies of scale, as suggested by scholars states, is that they persist in the sphere of industries and result in reducing costs by concentrating production in area clusters, as well as “…cause the short-run average cost and long-run average cost curves to shift downward.” The principles of external economies of scale, however, imply not to the individual, but to the level of industry.
In order to provide grounds for emergence of external economies, it is relevant to observe their nature at first. When speaking about external economies of scale, the tendency is to think about lowering costs of production, however this mostly implies to already established big markets, because for a small market it would be tough to compete in this sphere of development. The clusters do not have a particular area they have to specialise in, their emergence is also not the same, however typically it depends on geographical aspects and backgrounds. They form gradually and help through external economies of scale to promote better conditions for firms and significantly lower their costs. A relevant example of a cluster would be the Silicon Valley located in the United States. As it is commonly known, it is a cluster of the IT technology development sector, big firms have an incentive to place their production and research in there not only because they will have available specialised labour whenever they need it, but because they will also benefit from the conditions already established there. This example leads to explaining the emergence of external economies of scale. As it is the best explained by Alfred Marshall, “…if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its material.” Following this statement, in order to achieve development, Marshall suggests there are certain advantages which form the industrial policies that can be observed through external economies of scale differing on specific organisational levels- specifically he believes in establishing a “nexus made of, among others, the spirit of a nation, a common language and trust in the public infrastructure”, a way through which we can support this is examining the link between spatial economies and external economics of scale through the prism of the Guangdong Province in China. The spatial pattern of economics explores the viability of economic growth through “important economies of scale enforcing the geographic concentration of some activities”, the Guangdong Province is an excellent example of accounts of emergence of external economies of scale, “building upon effective knowledge spillover from global lead firms…”it has now become a centre defined by “strong growth dynamics in particular after 2000”. The Guangdong example illustrates how the province “yielded greater availability of degrees of freedom” as well as addressed “the multiplicity of spatial-temporal processes of innovation activities” which hampers the structural research and development of external economies of scale. Guangdong is formally known as a province that gradually formed as the largest economics sector in China, some years ago it was considered to be “an underdeveloped agricultural province on the south coast of China, with a GDP of only 18.6 billion RMB. However, in 2007 the Guangdong’s GDP has reached 3060.6 billion RMB, with an annual growth rate of 13.8%.” Overall, it is a striking example of how clusters, one of the main assets of external economies of scale, are contributing significantly to the returns of scale.

What primarily accounts for the emergence of external economies on a larger scale is that it provided economists to implement the Marshallian idea that “increasing returns can be an independent cause of trade and that the advantages that derive from large-scale production need not be confined within the boundaries of a firm”. Through looking at empirical evidences of how external economies emerge for the purpose of lowering costs and hampering innovations, this paper has examined Guangdong and the Silicon Valley, and their persisting dominance on the economical sphere and thus creates framework for successful implementations of external economies of scale in our intensely globalising world.
Bibliography
Paul R. Krugman et al., “International Economics: Theory & Policy 9th Edition”, p. cm - (The Pearson Series in Economics) John Curran, “Taking the Fear Out of Economics”, Cengage Learning EMEA, 2000

Alfred Marshall, The Principles of Economics, (London: Macmillan and Co. 8th ed. 1920)

Marco Bellandi & Annalisa Caloffi (2016) “Industrial policies in a Marshallian-based multilevel perspective”, European Planning Studies, 24:4, 687-703

Paul Krugman, “What’s new about the new economic geography?”, Oxford Review of Economic Policy, Vol.14, No.2,Oxford University Press and The Oxford review of economic policy, 1988

Ting Li & Wenying Fu (2015) “Spatial processes of regional innovation in Guangdong Province, China: empirical evidence using a spatial panel data model”, Asian Journal of Technology Innovation, 23:3, 304-320

Yangsheng Zhong, Xiaohui Wang, Guangmin He, “The Economic Theory of Developing Countries’ Rise: Explaining the Myth of Rapid Economic Growth in China”, University Press of America 2010

Grossman, G. M., & Rossi-Hansberg, E. (2010). “External economies and international trade redux.” Quarterly Journal of Economics, 125(2), 829-858

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[ 1 ]. Paul R. Krugman et al., “International Economics: Theory & Policy 9th Edition”, p. cm - (The Pearson Series in Economics) p.139
[ 2 ]. John Curran, “Taking the Fear Out of Economics”, Cengage Learning EMEA, 2000, p.117
[ 3 ]. Paul R. Krugman et al., “International Economics: Theory & Policy 9th Edition”, p. cm - (The Pearson Series in Economics) p.140
[ 4 ]. Alfred Marshall, The Principles of Economics, (London: Macmillan and Co. 8th ed. 1920) p.225
[ 5 ]. Marco Bellandi & Annalisa Caloffi (2016) “Industrial policies in a Marshallian-based multilevel perspective”, European Planning Studies, 24:4, 687-703, p.693
[ 6 ]. Paul Krugman, “What’s new about the new economic geography?”, Oxford Review of Economic Policy, Vol.14, No.2,Oxford University Press and The Oxford review of economic policy, 1988, p.10
[ 7 ]. Ting Li & Wenying Fu (2015) “Spatial processes of regional innovation in Guangdong Province, China: empirical evidence using a spatial panel data model”, Asian Journal of Technology Innovation, 23:3, 304-320, p.305
[ 8 ]. Ibid., p. 306
[ 9 ]. Yangsheng Zhong, Xiaohui Wang, Guangmin He, “The Economic Theory of Developing Countries’ Rise: Explaining the Myth of Rapid Economic Growth in China”, University Press of America 2010, p.viii
[ 10 ]. Grossman, G. M., & Rossi-Hansberg, E. (2010). “External economies and international trade redux.” Quarterly Journal of Economics, 125(2), 829-858. , p.829