Firms vary in size –there are large firms, medium and small firms. Firms of different sizes exist in the same industry.

 (The size is measured in terms of: the amount of inputs used, annual profits of the firm, financial position of the firm, number of employees, productive capacity in terms of output and sales, and the size of the market served by the firm/market share of the business).

Growth/expansion of a firm

Growth of a firm refers to the expansion of a firm from small-scale to large-scale and this is normally due to the need to enjoy economies of scale.

(This is indicated by increase in capital, expansion of output, expansion of premises, employment of more people, improvement in technology and operations in more markets among others)

Ways through which a firm grows:

1. Natural growth /internal growth. This is the expansion of a firm using internally generated profits of the firm. Under this, the output, sales and productive capacity of the firm increase over a period of time.

 It involves increasing inputs so as to make more output or extend the range of products.

(Internal growth results into efficient management which also results from internal economies of scale).

2. External growth

  • Through merging/amalgamation. Merging refers to the joining/coming together of two or more firms to form one bigger firm.
  • Through take-overs. This involves a firm buying the assets of another firm so as to expand. The firm whose assets are bought loses its identity.
  • Through partnerships with other firms. This involves firms coming together to contribute capitalto do business with an aim of making profits.

Factors that determine the size/growth of a firm

  1. The amount of capital available. Firms with large sums of capital grow bigger in size as they easily expand production by purchasing more equipment and inputs while firms with limited capital remain small because they do not easily expand production.
  2. The size of the market/ the market share of the business. Firms with a large market share grow bigger in size since expansion of output is encouraged to make more profits while firms with a small market share remain small in size due to discouraged expansion/ low profitability.
  3. Objectives of the firms. Firms aiming at sales / revenue maximization grow bigger because they produce as much output as possible while firms aiming at profit maximization produce lesser output and charge higher prices.
  4. Working conditions/ terms of service. Good working conditions such as presence of transport and medical allowances available; makes workers to put in a lot a lot of effort and the firm is able to grow bigger while firms with poor conditions of work remain small in size since workers are not motivated.
  5. Level of technology used in production. Firms with efficient / advanced techniques of production easily expand their scale of production (are more efficient) leading to greater expansion in size while firms with inefficient techniques of production are not able to easily expand the scale of production leading to small size.
  6. Government policy of taxation and subsidization/ towards investment. Government encourages expansion of firms through reduced taxation, subsidies which encourage investors while government discourages expansion of firms through high taxation, removal of subsidies and regulation which discourage investors.
  7. Time/period in production. Firms which have stayed in production for a long period of time grow bigger in size due to purchasing of assets, hence producing more output at low average costs while firms that have just entered the industry (beginner firms) are smaller in size since they produce low output and operate at very high average costs of production.
  8. Quality of management. Firms with efficient management grow bigger in size since the production process is well monitored (for example the workers do not waste resource inputs) while firms with inefficient management remain small in size since production is not well monitored.
  9. Availability/supply of basic raw materials. Firms with readily available raw materials grow bigger in size due to the ability to produce more output while firms with inadequate raw materials are small in size since they do not easily increase output.
  10. Nature of goods or services provided by the firm. Firms dealing in personal or direct services remain small they require personal touch/ direct contact with the customers; and also, firms which produce on special order. However, firms dealing other goods or services grow bigger in size, since they even put up more distribution points.
  11. Location and availability of land for expansion. Firms which are strategically located where there is large land for expansion easily grow bigger in size by expanding scale of production while firms located where there is limited land for expansion remain small in size even with more profits.
  12. Entrepreneur’s choice. Some entrepreneurs prefer or have a major objective of having large-scale firms and hence produce a wide range of products for the customers, hence growing bigger in size while other entrepreneurs perform better with small-scale firms and are less motivated to expand them.
  13. The level of entrepreneurship skills. Firms with high level of entrepreneurship able to do a lot of research, carry out innovations and inventions –hence expanding the scale of production easily while firms with limited entrepreneurship skills do limited research and hence remain small in size.
  14. The number of skilled workers employed/ availability of skilled labour. Firms with many skilled workers are more efficient since workers are more productive and hence growing bigger in size while firms with limited skilled labour are less efficient in production and hence remain small in size.
  15. Degree of competition in the industry. High degree of competition encourages firms to expand the level of production to capture a larger market / to out-compete the rival firms while limited competition discourages the expansion of firms since there are monopoly tendencies.
  16. Level of development of infrastructure. Well-developed infrastructure such as power generation to run machines , better roads to transport raw materials , efficient banking facilities  leads to efficient production and hence expansion of firms while  underdeveloped  infrastructure like poor roads, inefficient power supply lead to inefficiency of production  which limits the expansion of firms.
  17. The possibility of merging of firms. Firms that come together grow into bigger establishments by joining the assets and entrepreneurial ideas while limited/ no merging limits the expansion of firms.
  18. The political climate of the area. Political stability increases the confidence of investors and thus encourages the expansion of firms while political instability reduces the confidence of investors and discourages expansion of firms.


Qn. Why may firm decide to remain small despite the advantages of large-scale production?


Qn. Account for the continued existence of small-scale firms in your country.

  1. Limited capital
  2. Small market size /limited market for output.
  3. Poor working conditions.
  4. Low level of technology employed.
  5. Some are beginner firms-firms being at the infancy stage of growth.
  6. Poorly developed infrastructure.
  7. Limited skilled labour supply
  8. Limited supply of raw materials.
  9. Choice of the entrepreneur to remain small, due to the need to maintain full /easy control and management over the firm I.e. small firms are easy to manage.
  10. Limited entrepreneurship skills.
  11. Poor land tenure system. For example, small land holdings which discourage more production/ expansion of firms.
  12. Small firms are flexible.
  13. Fear of increased taxes by government/ government policy discouraging expansion of firms such as increased taxation and blocking mergers.
  14. Existence of firms dealing in personal / direct services—which need direct contact with the customers (and goods for special order)
  15. Some firms being used as research units / experimental firms and these work best when kept small. For example, agricultural demonstration farms.

Reasons why small-scale firms survive alongside large scale firms

  1. Some of the small-scale firms are still at their infancy stage unlike large scale firms which have stayed long in production. The small-scale firms have hope of growing into large scale enterprises in the future.
  2. Fear of heavy taxation by the government associated with large scale firms.
  3. Limited capital available for many small firms which limits the purchase of inputs and equipment for expansion unlike large firms with more capital available.
  4. Some of the firms are experimental units and so there is no need of expanding them into large scale establishments.
  5. Some firms produce commodities according to special order by customers and hence there is no need for producing more than the required output unlike other firms producing for the wider market.
  6. Limited market for the products of some firms, which discourages further production of output/ expansion of production unlike large firms which have a large market for their output.
  7. Fear of losing control of the firm once it expands. This is especially due to limited entrepreneurial skills possessed by the owner.
  8. Limited supply of some inputs, since some are imported expensively which limits expansion unlike large firms with readily available raw materials.
  9. Large scale firms suffer more in case of breakdown or catastrophe unlike small firms suffering minor losses.
  10. Small firms provide allowance for flexibility in production in that, they are easily changed from one line of production to another; which is not the case with large firms.
  11. Government policy of encouraging small scale firms to create more employment opportunities unlike large scale firms which create less employment due to use of capital-intensive technology.
  12. Some of the small firms are located far from large firms and therefore monopolize local markets.
  13. Some firms use by-products of large firms and therefore co-exist with large firms since they do not compete with them.


Qn. Explain why small-scale firms survive /exist alongside large-scale firms in your country

  • Present paragraphs comparatively (answers are above)

Guiding questions

  • Explain the factors that determine the size of firms in an economy
  • Level of capital stock available.
  • Level of technology employed.
  • Level of supply of raw materials.
  • Explain the causes of differences in the size of firms in an economy

(Use variation or differences)


  • Variation in the level of capital available
  • Differences in the level of technology.
  • Variation in the supply of raw materials
  • Explain the factors that limit the growth of firms in your country.
  • Limited capital stock
  • Under developed technology
  • Limited supply of raw materials

Merits of small-scale firms

Note: Small scale firms are production units involving low capital investment, occupy small land area, have few workers, less mechanized and generally produce small quantity of output.

  1. They are easy to control and manage. This helps to reduce the level of losses incurred.
  2. Losses are minimized in case of industrial breakdown. The risk suffered is relatively manageable.
  3. They are flexible and thus reduce wastage of resources. They can easily change from on line of production to another to meet the changing market demands and conditions.
  4. They are less costly and require limited capital to start—hence are easily started by local people from personal savings and supported by small loans without dependence on foreign capital.
  5. They are appropriate for the small markets available in developing countries, and hence minimizing wastage of resources. Much of the output is consumed within a small radius from the area of production.
  6. They are appropriate for personal services, due to the need for personal contact between firms and the customers.
  7. They promote entrepreneurial development skills among individuals. They act as a training ground for entrepreneurs, hence developing innovativeness and skills of managing industries. In the long run it promotes medium and large-scale establishments.
  8. Small scale firms encourage the use of the available local resources in a sustainable way. This is because of their slow rate of resource exploitation and also the use scrap materials as inputs unlike large scale firms.
  9. They promote use of local technology. They produce small machines like grain milling machines through research and continue improving on them. More so the small-scale firms mainly use labour intensive technology.
  10. They provide cheap/ affordable goods and services to the population. This is because of the low cost of production incurred given the use of locally available raw materials. This in turn increases the standards of living.
  11. Create more employment opportunities to individuals. Collectively the small-scale firms offer employment to a number of people, both trained and casual workers, hence easing the unemployment problem/ raising the income levels and improving the standards of living.
  12. Increase the national output/ level of GDP. Small scale firms produce more goods and services which in turn expands the country’s national income.
  13. Encourage fair income distribution and balanced regional development. Small scale firms are located in many areas and widen the range of economic activities from which people generate income, and this reduces the income gap between the rich and the poor.
  14. Increase / generate government revenue. Government yields revenue from licensing and taxing the small-scale firms and the revenue is used to finance government development programs.
  15. Encourage the development of infrastructure. The setting up of small-scale firms in various areas enhances the associated/ supporting infrastructure such as better roads, baking facilities and recreation facilities.
  16. Provide a variety of goods and services. Small scale firms provide more products and this widens the choice of consumers and thus better standards of living.
  17. Small scale firms promote economic diversification. This is because they engage in a wide range of economic activities and thus the economy is able to develop the agricultural as well as industrial sectors. They also have forward and backward linkages.
  18. They reduce foreign exchange expenditure. This is because they produce many goods and services which would be imported which reduce expenditure on imports and thus improving the balance of payment position.

Demerits of small-scale firms

  1. Provide low tax revenue to the government. This is because most small-scale firms either pay very little tax or do not pay tax at all since many are not legally registered by government, yet taxation is a major source of government revenue.
  2. Production of poor-quality output. This arises from use of low level of technology, low quality inputs and general failure to follow standard guidelines. This output fetches low prices on the local and international markets and hence less income/ foreign exchange.
  3. Increase congestion in the urban and semi-urban areas. This is because they are mostly concentrated on the margins of urban centres, and this increases the growth of slums and high crime rate.
  4. Specialization is difficult and hence production is costly.  It is difficult to use specialized machinery and hence benefits foregone.
  5. Small scale firms do not enjoy economies of scale that large-scale firms enjoy because of increased output. The average costs remain high for each unit produced.
  6. Small scale output is not easy to market in foreign markets due to lack of assured regular supply to the potential foreign buyers. This limits the amount of foreign exchange earned.
  7. Increase administration costs by government to oversee their activities. This is because many small-scale firms come up every year and many are not officially registered.
  8. Increase wastage of resources due to unnecessary competition through duplication. What would have been produced by one or a few firms is produced by many small-scale firms and thus irrational use of resources in the long run.
  9. Small-scale production contributes less to employment during the infancy stages. In the initial stages, they do not absorb abundant labour since much of the labour used is family labour yet there is rampant unemployment in developing countries.
  10. Increases social costs such as pollution of the environment due to poor disposal of industrial wastes. This negatively affects the economic welfare/ standard of living.
  11. Promote underutilization o resources. This is due to low level of technology and yet also they serve a relatively small market, hence production at excess capacity.

Implications of large-scale industrial firms

Note: Large-scale firms refer to production units involving high capital investment, occupy large land area, employ many (hired) workers, highly mechanized, and produce large quantity of output.

Positive implications

  1. Facilitate easy marketing of output domestically and internationally. This is because it ensures reliable supplies and this leads to increased inflow of income.
  2. Large scale firms are able to enjoy economies of scale because of increased output. The firms are able to produce at lower cost per unit of output than small scale firms. This in turn leads to low prices of final output and more sales.
  3. Increase quality of output/ efficiency in production. This is because they are able to employ specialists and also carryout innovations in production. This output fetches high prices on the market, hence increased income.
  4. Creates many employment opportunities to the people of the country. Large scale firms depend greatly on hired labour and many are employed (at various stages of production) ranging from casual to skilled professionals. This increases incomes and the standard of living.
  5. Promote development of infrastructure such as roads, banks, electricity and schools. This is because large scale production greatly depends on good infrastructure and this in turn benefits the surrounding communities.
  6. Facilitate technological development and transfer. Large scale production facilitates improvement in production methods and also enables the country to acquire advanced production techniques from other countries, leading to increased output.
  7. Increase government revenue through taxation. This is because large scale firms widen the tax base in terms of number of taxable items created. The revenue facilitates the provision of social services.
  8. Promote the development of labour skills through constant practice/ on-job training in the production process. This in turn leads to the growth of entrepreneurship in the country.
  9. Improve on the terms of trade of a country. This is through production of higher quality output for export, which fetches high prices on the world market and thus earning more foreign exchange.
  10. They improve the balance of payment position. They save foreign exchange through production for the home market mainly as a result of import substitution strategy. Large scale firms reduce dependence on foreign products.
  11. Large scale firms promote forward and backward linkages with other firms. They buy raw materials in large quantities and then sell their products for use by others firms. This promotes a more balanced sectoral development.
  12. Large scale firms facilitate specialization and division of labour. The firm concentrates on a particular line of production and labour concentrates at particular stages of production, and this also contributes to efficiency in production.

Negative implications

  1. Large scale firms widen income inequality in the economy. The income gap between those employed and those not employed; between industrialists and people in other sectors. This in turn creates social tension.
  2. Regional imbalance in development. This is because of uneven distribution of large-scale firms in the country as they are mainly urban-based, and this leads to rural-urban migration and overcrowding in rural areas.
  3. Limit employment creation/ increase technological unemployment. This is because of the use of mainly capital-intensive techniques of production-which implies use of more machines than labour, leading to technological unemployment.
  4. Large firms increase the social costs such as pollution of the environment. This negatively affects the quality of life such as by causing deadly diseases.
  5. Some large firms greatly depend on imported inputs and worsens the balance of payment problems/ increases external resource dependence.
  6. Large scale firms create monopoly tendencies and therefore exploit consumers through high prices. This is by out-competing the small/ inefficient firms.
  7. Large scale firms increase dependence on foreign investors. This is because they require a lot of capital to start and manage, and hence are mainly owned by foreign companies/individuals.
  8. Continuous capital outflow through repatriation of profits and importation of inputs which undermines capital formation. This is because many of the large-scale firms in developing countries are foreign-owned.
  9. Result into mass production which is at times difficult to market due to narrow markets. This causes prices to fall and adversely affects all producers due to wastage of resources.
  10. Large scale firms lead to over exploitation of natural resources such as minerals, forest resources. This leads to quick resource depletion which negatively affects the future generations.
  11. They exert pressure on government for protectionism and tax concessions. Large scale investors always advocate for supporting incentives from government such as tax holidays, subsidies. Tax holidays reduce government revenue yet subsidies increase government expenditure in the long run, which lowers the net benefit from large scale enterprises.


Guiding questions

1. (a) Distinguish between a firm and an industry (4mks)

    (b) Assess the role of small-scale industries in the development of your country (16mks)

2. (a) Explain the contribution of small-scale industries to the development of your country (10mks)

    (b) What are the challenges faced by small-scale industries in your country? (10mks)

3. Examine the implications of large-scale firms in the economy of your country (20mks)