Word doesn't automatically 'shrink' graphics. What it does is it reads the image metadata and, subject to the space available on the page inserts the image full-size or, if there's insufficient space between the margins, reduces it to fit. AFAIK, if the metadata say the image is 300dpi, Word will scale it accordingly. Most images have no scaling data (or a default 72dpi), so Word tends to insert them as large as possible.

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Cheers,
Paul Edstein
[Fmr MS MVP - Word]