(DP 1980-06) A Theory of Ancillary Firm Development

Abstract

The recent decades have observed a new surge of invest in an important role for small- and medium-sized firms to play in economic development. They not only offer greater employment opportunities but can also be a potential source of indigenous industrialization. The present paper argues that machinery industry is an excellent basis for such development, because its engineering properties can lead to vertically disintegrated industrial organization, where a multitude of dependent firms are specialized in the production of interchangeable parts and components. The paper attempts to assess major factors that may lead to the growth of such "ancillary firms", in particular the relative size of the product market as compared with the extent of scale economies. In the same vein, pertinent factors for determining the make-or-buy decisions by assembly firms are discussed and evaluated.