Changing Corporate Strategy on the European Single Market

Dynamics of Firm Size and Industrial Concentration

Abstract

This paper attempts to examine how the corporate strategy has changed on the Single Market through analyzing dynamics of firm size and industrial concentration. The change in the corporate strategy in adapting for the Single Market is essential to realize the full effect of the Single Market Program (SMP), and thus the importance of such change was emphasized in the Cecchini report. Since changes in firm size and concentration result from the change in the corporate strategy, studies of their latest trends are appropriate for the purpose of this paper.
It was expected that significant increase in firm size and concentration as a result of the SMP would occur in industries with high sensitivity to the SMP and with high potential for scale economy. In fact, it is in the industries with both “low sensitivity and low potential” that such increase has occurred since the implementation of the SMP. The cause of this unexpected result is that these firms have taken advantage of an EU-wide market and spread their increasing endogenous fixed costs (e. g. advertising and R & D expenditure) over the Community to benefit from unit cost reduction.
Why have endogenous fixed costs increased? This is because the maturity and the competitiveness of the European market required some kind of differentiation strategy that could have been primarily brought about by endogenous fixed costs increase. In such a case, cost reductions would have been sought principally by exploiting the firm-available type of scale economy, as were analyzed in the European Commission's reports.
This fact suggests that the growth of firm size may be considered as a competitive weapon. However, the number of firms capable of enlarging their size enough to exploit scale economies is limited. The alternative to this is to specialize in niche markets. And this may well intensify the bipolarization of firm size. Moreover, as the differentiation has advanced, the industrial homogeneity has been destroyed. Business activities have been diversified within the same industry. Particularly, firms have shifted their value adding structure from production-based to design-based one. This shift is the key to restructuring the firm toward more efficient management.
These phenomena are remarkable especially in the matured industries which had only limited market opportunities and little possibility for any significant structural change. Yet, the SMP has intensified competition for differentiation and caused a structural change in the matured industries, because it triggered integration of national markets where similar structures of demand and production prevailed. In Europe, the matured industries are relatively important. Therefore their activation can make significant contribution in bringing dynamism to the European economy.