Friday, February 20, 2009

Clustering Businesses

A very interesting article on why businesses cluster in particular areas as they tend to do, and a policy primer for Sacramento.

An excerpt.

“What drives industry to locate in one region and not in the next?

“Economic geography – the distribution of economic activity over physical space – has always been central to economic development. Policy-makers trying to encourage economic activity to locate in under-developed regions want answers: Is it infrastructure? Fiscal incentives? Good business environment? Or could it be agglomeration – the compounding effect of industry clustering in a particular location?

“And if the key factor is indeed this critical mass, can the effect run from one type of industry to another? Do existing, more traditional manufacturing clusters attract newer services industry?

“The question of where and how services firms decide to locate themselves has become exceedingly central to understanding economic growth and development. Services, and especially knowledge-based services, now account for a greater proportion of advanced-country GDPs, and increasingly so for emerging economies.

“New Economic Geography (NEG) theory would argue that agglomeration advantages lock business activity into core regions. The core also supports the existence of intermediate industry in the periphery, and so specialized input-suppliers co-locate close by. For instance, think of Detroit’s production of automobiles and the auto-parts manufacturers who locate in geographically proximate Michigan, Ohio and Indiana.

“The theoretical business-economics literature would also argue that manufacturing and services are intricately linked in the production chain. For example, marketing services add the finishing touches in the final stages of a manufacturing process, or research and development services result in increased production within the "real" economy. Service inputs into production, such as design, technological refinements, and branding, account for a major part of value added in manufacturing industries. The result is that it is becoming difficult to identify where the product ends and where the service begins.”