External Economies of Scale

Economic textbooks will tell you about Economies of Scale. Many even mention External Economies of Scale, but it is often hard to visualize any realistic example of where this is actually the case. This is a very good, high profile example of external economies of scales from The Economist when discussing comparative advantage.

What Shenzhen has to offer on top is 30 years’ experience of producing electronics. It has a network of firms with sophisticated supply chains, multiple design and engineering skills, intimate knowledge of their production processes and the willingness to leap into action if asked to scale up production.

What Shenzhen provides, in other words, is a successful industrial cluster. It works for Apple because many of the electronic parts it uses are commodities. The real innovation lies in designing the product and creating smart software, which is the speciality of another successful cluster, in Silicon Valley, where Apple is based.