The Economies of Scale in Iran Manufacturing Establishments Jafar Ebadi 1 , Saeed Mousavi Madani 2 Abstract One of the topics that is implying after two decades of applying import substitution policy in Iran manufacturing sector, is the importance of industrial export expansion and foreign relations. The main impetus to this policy transfer is the market expansion and potential gains of exploiting the economies of scale and technical upgrades. By this argument this research estimates efficient scale and gains of producing in optimal scale in large establishments in Iran manufacturing groups at 2-digit ISIC (Rev.2). For this purpose long run cost function and translog functional form of it as a flexible functional form is selected for theoretical basis. By using indirect seemingly unrelated regressions method and data at the mean of a representative establishment are chosen to estimate the minimum and the slope of LAC. The result shows that the economies of scale exists in all of the industrial groups and in the last year of this research(2001) all of them except the manufacture of non-metallic mineral products(ISIC36) were producing lower than optimal scale. The economies of scale is more important in capital-using groups such as manufacture of other products (ISIC39), wood and furniture (ISIC33), paper and publishing (ISIC34), machinery and equipment (ISIC38) and basic metals (ISIC37) respectively, so that a representative firm in these manufactures for producing at MES should increase 671%-197% in its product and in this way the firm could turn into a profitable one. In manufacture of chemical product (ISIC35) as a second largest group in Iran manufacturing sector, the firms are producing near the optimal scale and the optimal scale is 51% more than their current scale. Finally in the case of manufacture of wearing apparel, textile and leather (ISIC32) and the manufacture of food, beverage and tobacco (ISIC31) each firm for achieving optimal scale should increase its output 74% - 26% respectively. The study of market structure even shows that the most concentrated market of manufacturing groups are coinciding with the most potential groups for exploiting the economies of scale. Both of these reasons implies the domestic market constrain acts as a barrier to gathering the benefits of economies of scale and necessitates the importance of applying outward oriented policies. 1 Jafar Ebadi, associated professor, faculty of economics, University of Tehran 2 Saeed Mousavi Madani, MA in economics, economic expert.