As mentioned earlier Lipsey and Crystal mentioned economies of scale resulting in increasing returns for the firm and these increasing returns being derived from one time costs. The one time costs are usually categorized as the sunk costs and the fixed costs of production. These costs do not increase with the increase in production as a result any additional unit produced does not result in increasing these costs in the proportionate degree. These costs are independent of the scale and can be seen in the long term cost curves as well. These costs are one of the main reasons that driver the short run costs curves and ultimately the long run costs curves down resulting I economies of scale. However these costs need to be invested in as time passes. This results in the costs increasing for the firm and the diseconomies of scale settling in.
A research by David Audretsch depicted that “based on a sample of over 7,000 Dutch manufacturing firms, the authors find considerable evidence that such a strategy of compensating factor differentials is pursued within a European context. When viewed through a static lens, the existence of such a strategy, while making small and sub-optimal scale enterprises viable, suggests that they impose a net welfare loss on the economy. When viewed through a dynamic lens, however, the findings of a positive relationship between firm age and employee compensation as well as firm age and firm productivity suggest that there may be at least a tendency for the inefficient firm of today to become the efficient firm of tomorrow.” (Audretsch et al, 1995)