Return to scale and external economies: empirical evidence from Greek two-digit manufacturing industries

This paper applies the methodology developed by Caballero and Lyons (1989), in order to estimate jointly the degree of internal returns to scale and the extent of external economies in Greek two-digit manufacturing industries during the period 1963-90. Overall, we find that only two industries show evidence of internal increasing returns: food products, and transport equipment. On the other hand, we cannot reject the presence of external economies. According to our estimates if an industry increases its inputs in isolation by 10% its output rises by 6%. However, if all industries act in concern its output rises by 10%, implying social constant returns to scale.