A Quasi-Empirical Mapping of Optimal Scale of Enterprise

There is a substantial empirical data base suggesting that increases in organizational size and complexity tend to be accompanied by decreases in strict economic efficiency. There has, however, been no attempt to provide a generalized explanation for these results, or to asses their macroeconomic implications. Here we attempt to do this, focussing initially on the limited bounds of rationality the management sciences can currently make available. When these are considered, the efficiency disadvantages of large-scale, highly diversified firms become intelligible as follows: When an organization enlarges itself primarily through diversification, it becomes increasingly susceptible to certain administrative diseconomies; beyond some point, these more than offset efficiencies available through size-related economies of scale. There is, in effect, some optimal scale of enterprise, violations of which force a firm to disserve its customers, investors or the general economic welfare.