Full text: The Problem of Capital Intensity

Chapter III of Small and Big 
Business.Economic Problems of the 
Size of Firms.Oxford 1945. 
Entirely re-written 1988.. 
1. In a comparison of small and big firms the question also arises 
whether they differ as far as their capital-output ratio is 
concerned. Apart from the "morphological" question of the 
characteristics of firms of different size there exists also the 
different but somehow related question how a growing firm will 
change and, in the present context, how it will use its 
accumulating capital: To what extent it will use it to produce the 
same output with more capital and to what extent for just 
expanding capacity. This second aspect of the problem leads us to 
consider the capital-output ratio in a much more general context, 
including the question of its historical change. 
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We are not oversupplied with data on capacity or capital. I tried 
to use the U.S. Statistics of Income for corporations which give 
capital assets and sales ( Table 1 ).There seems to be a strong 
increase in capital-sales ratios in various industries in the 
highest size classes, and more generally in all industries in the 
lowest size classes.The crux of these data is the vertical 
integration of the big concerns. In fact it is only too easy to 
see that the strong increase in the capital-sales ratio in the 
highest size classes of corporations occurs in the pulp and paper 
industry where the large concerns own forests, in the iron and 
metal industries where they own mines, and in the chemical and 
allied products industries where they own oil wells etc and means 
of transport like tankers. In the other industry groups the 
increase in the highest size classes is either absent or small. 
On the other hand there is a very general increase in the capital- 
sales ratio in the lowest size classes. This can be explained very 
easily by the fairly general consideration that small firms lack 
funds and therefore prefer hiring or leasing to ownership wherever 
it is feasible. Thus with increasing size, from the smallest size 
class to the medium ones hiring and leasing is replaced by 
ownership of buildings, shops,plant, premises,means of transport 
e t c . 
This has practically the same effect as a decrease in 
proportionate indebtedness. In fact, hiring or leasing means 
borrowing capital in natura instead of incurring debt in order to 
buy the equipment in question. . In the form of a rent the small 
firm pays the equivalent of interest and annuity on borrowed money 
and in so far as the equipment in question is necessary to the 
running of the enterprise the firms profits are precharged in the 
same way as they are when they have borrowed money. The practice 
of avoiding ownership has therefore nothing to do with the 
capital-output ratio which is a matter of technology but is rather 
pertinent to the topic of the following essay on the financial 
structure of firms. 
As far as production technique as such is concerned statistics of 
the above type can give us little help and we have to turn to 
other sources such as engineering data to get at least a tentative 
answer. The evidence,in fact,tends to show that the capital-output 
ratio often decreases with increasing size of the production

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