why firms stay small

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  • Why companies remain small
    • Barriers to entry
      • Legal
        • permit and license requirements stop growth and expansion
        • patent laws can prevent production of a product for a length of time
        • e.g. planning permission for expansion, accountant registry with ICAEW
      • Overt
        • from existing members of market
        • e.g. advertising, limit/predatory pricing, branding
      • Sunk costs
        • e.g. advertising (non contestable markets have higher sunk costs)
      • capital costs
    • Niche markets
      • no support for growth, possible local monopoly e.g manufacturer of cricket balls
    • Lack of resources
      • lack of knowledge or funds, increasing output increases costs such as increase in levels of financial regulation
      • lack of motivation, opportunity cost of time spent expanding
    • firm already at most productively efficient point
      • expansion leads to diseconomies of scales
    • benefits of small firms
      • additional training grants and government support
      • stay below tax thresholds
    • avoid unwanted attention from bigger firms
    • why do companies break up
      • grow too large and experience diseconomies of scale
      • lack of synergy
      • value of demerged firms greater than value together
      • focus on aspects of market


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