The Economies of Scale in Iran Manufacturing Establishments

One of the topics after two decades of applying import substitution policy in Iran manufacturing sector is the importance of industrial export expansion and foreign relations. The main impetus to this policy transfer is the market expansion and potential gains of exploiting the economies of scale and technical upgrades. Based on this argument this research estimates the efficient scale and gains of producing the optimal scale in large establishments in Iran manufacturing groups at 2-digit ISIC (Rev.2). For this purpose a long run translog cost functional, flexible function form is selected on the theoretical basis. By using indirect seemingly unrelated regressions method, data at the mean of a representative establishment are chosen to estimate the minimum and the slope of LAC. The result shows that the economies of scale exists in all of the industrial groups and in the last year of this research (2001) all of them except the manufacture of non-metallic mineral products (ISIC36) were producing lower than optimal scale. The study of market structure shows that the most concentrated market of manufacturing groups are overlapping with the most potential groups for exploiting the economies of scale. Both of these reasons implies that the domestic market constrain acts as a barrier to gathering the benefits of economies of scale and necessitates the importance of applying outward oriented policies.