TTTIV.
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