Geography Reference
In-Depth Information
lapse of the market. As a response to this, the Salop model demonstrates
that a combination of geographic clustering and product variety clustering
enhances both the level and growth of demand as well as price stability.
Indeed, this type of behaviour is typical of MNEs entering new markets.
Yet, the dynamic nature of locational behaviour is not so obvious in
the basic Salop model, unless we also allow for the fact that all firms in
the industry will want to increase the overall size of the market. This is
achieved by the additional expenditure behaviour on the part of the con-
sumers, which is a particular type of externality associated with geogra-
phy. As we will see in Chapter 5, externalities not only provide the main
rationale for industrial clustering in geographical space, but also underlie
the dynamic mechanisms by which such clustering evolves.
Finally, discussions of spatial profit and cost variations along with the
role played by uncertainty in driving evolutionary processes, allow us to
use the models of geographical- and product-space competition in order to
understand how concentrations of activities arise in space.
Surprisingly, in some respects the simple location theory models dis-
cussed in this chapter work particularly well for MPDEs and MNEs.
While MPDEs and MNEs are very different from the representative firm
of microeconomic location models, both MPDEs and MNEs are typi-
cally firms characterized by relatively good information and knowledge
resources and also low relocation costs, in comparison to other firms. As
such, theoretical models of location behaviour and market competition
based on profit maximizing principles, allied with models also allowing for
uncertainty and evolution, are actually very relevant for understanding the
investment behaviour of modern multiplant and multinational firms. This
is particularly the case for MNEs representing either
general
-
asset seeking
or
market seeking
types of behaviour.
As already anticipated in Chapter 2, both MNEs and multiplant
domestic enterprises (MPDEs) carry out their operations in multiple
geographical locations and, from the perspective of the types of location
theory discussed in this chapter, they can be treated in a largely analogous
manner. However, a critical distinction between the two types of firms has
also been highlighted here. Beyond the most apparent fact that MNEs
operate across contexts which differ substantially in terms of economic,
social, cultural and institutional characteristics, the crucial difference
between MNEs and MPDEs lies precisely in the degree of access that
MNEs have to a much broader variety of sources of information and new
knowledge. These knowledge sources, which can be either intra-firm or
inter-firm knowledge in origin, provide the MNE with huge opportunities
for acquiring competitive advantages through the combining, blending
and integration of complementary kinds of technical and organizational
