Sub Optimal Capacities in Iranian Manufacturing Industries and Its Role in Increasing National Production

The creation of new firms and the growth of existing firms are considered as two key factors to increase the production in the economic literature. Whereas, in comparison to the first factor, the growth of existing firms, especially when the main fraction of firm's capacity is left unused and in other words, the production level is less than optimal size, provides the basis for efficient allocation of production resources such as labor and capital. Accordingly, this paper attempts to estimate the optimal capacity and compare it with existing capacities of manufacturing industries to examine the increase of production by the growth of existing firms during 2005 to 2007. To estimate the optimal size of firms with ten and more employees in terms of production, the Comanor & Wilson Approach is used at the four-digit industry levels. The results indicate that more than 90 percent of manufacturing firms produce less than their optimal size and if the firms increase the production to achieve this size, the production level will increase at least by three to four times. Whereas, also in terms of the policy, achievement to the optimal size is very necessary to efficient allocation of production resources and thus increase national production in the industrial sector.