Geography Reference
In-Depth Information
systems as discussed in Chapter 4, we will discuss the dynamics of differ-
ent spatial agglomerations by taking into account the ways in which firms,
and in particular MNEs, may interact with the local industrial environ-
ment, as defined in technological and, ultimately, social terms. On the one
hand our final aim here is to expand a schematic transactions costs-based
taxonomy of spatial clusters so as to include some of the basic properties
of innovation and learning processes. This will allow us to depict possible
models of spatial evolution. On the other hand, the organizational and
spatial structure of MNEs also changes over time. As we will see, the inter-
action between MNEs and industrial locations, and the degree of openness
and attractiveness of regions and clusters, is essential for understanding
their dynamics and the directions of global competition.
5.2
AGGLOMERATION ECONOMIES IN THEORY
In Chapter 3 we used the Weber, Hotelling and Salop models to examine
the interactions between firm location behaviour, factor and output
prices, product variety, transactions costs, and firm strategy. One of the
major issues which began to emerge from these discussions is that many
aspects of firm location behaviour have a dynamic nature. In the Weber
model these evolutionary outcomes are a result of new supply or market
opportunities in response to factor price changes; in the Hotelling model
they are a strategic response so as to prevent a competitor firm from domi-
nating the market from an advantageous location; and in the Salop model
they are a result of the effects of product variety which mitigate potential
price wars and also promote spillover effects.
This type of dynamic behaviour can lead to firms clustering together in
space. However, there is immediately a potential problem associated with
industrial clustering, and this is the effect on land prices. If firms tend to
cluster in a particular location there is automatically a pressure on local
land inputs due to the competition for land, the result of which is that local
land prices rise. In order to maintain a sufficient labour supply at that
location, labour prices will also have to rise accordingly, otherwise local
workers will tend to move away. As such, it immediately becomes clear
that industrial clustering is therefore associated with rising local land and
labour prices. From our knowledge of the Weber model, these congestion
effects mean that the location now becomes less profitable, holding every-
thing else constant. As such, the original rationale for the geographical
clustering of firms disappears. That is, of course, unless there are some
countervailing local forces or mechanisms which somehow more than
compensate for these adverse congestion effects. In the next paragraphs
