The Eastman-Stykolt Hypothesis Reconsidered

Abstract

In their frequently cited book Eastman and Stykolt (1967) advanced two major propositions concerning the effect of small market sizes on Canadian industry. Specifically they predicted that in tariff protected markets in which domestic consumption is small relative to the minimum efficient scale of plant one would discover both an abnormally high fraction of output produced in plants of suboptimal scale and an abnormally high percentage of foreign ownership. These hypotheses have become deeply ingrained in the discussion of Canadian industrial economics.1 In most cases they are accepted as a basis for policy discussion without further investigation. This paper assesses the theoretical and empirical support for the first EastmanSykolt proposition, that small market size induces suboptimal capacity. On the basis of an extensive literature search2 it concludes that there is considerable empirical support for some aspects of the theory but that the theory itself has not been satisfactorily formulated.