Economies of scale occur when businesses are able to lower their per-unit costs of producing goods or services by increasing production. When the factors that create these situations occur outside of the business itself, these are considered to be external economies of scale. For example, an improved transportation system in a country could allow companies to ship more goods at a lower cost per unit. In the cases of companies that had no part in improving the transportation network, this would be an external economy of scale. External economies of scale often occur because an industry is growing in size, allowing the companies within that industry to benefit and achieve lower costs per unit of goods or services.

One of the first major external economies of scale with far-reaching results was the invention of the automobile. Before cars, trucks and tractor-trailers, goods were transported from one place to another by rail, which meant that industries dependent on goods needed to be located near a train depot. This influenced the cost of real estate and increased overhead and production costs. With the introduction of the automobile, companies could operate in any part of a city, which lowered the transportation costs for goods over short distances, because it was cheaper to ship these goods by car than by rail. The lowered transportation costs meant a lower cost for producing items and created external economies of scale for many businesses.

When an industry is expanding, companies within that industry often benefit from external economies of scale. For example, high-tech companies might benefit from factors that result from an expanding high-tech industry, such as a government improving communications networks or from colleges and universities producing more qualified workers to meet the demands of the industry. These companies also might benefit from an expanding industry because the number of suppliers could increase, creating competition and lowering the suppliers' prices.