Geography Reference
In-Depth Information
high number of local consumers, thereby reducing the risk associated with
these investments faced by the suppliers. At the same time, the local con-
sumer firms benefit from the fact that the existence in situ of such specialist
services, intermediate inputs and infrastructure, reduces the costs faced by
all the local firms.
Marshall's third observation relates to the fact that industrial clustering
facilitates the rise of
specialized local pools of skilled labour
. A region which
is not only industrially specialized but which also has an established tradi-
tion in a particular sector, over time will develop a large local labour force
with the technical and organizational skills appropriate for that industry.
In this case the major advantage of geographical proximity is therefore
that it allows for an efficient local job search and hiring-matching process
within the labour market, as there will be both many firms and many
workers with appropriate skills. The search costs associated with employ-
ment are therefore systematically reduced in a clustered location. At the
same time, in a locality which exhibits a high degree of industrial cluster-
ing in a high variety of industries, such a diverse local industrial structure
allows both firms and workers to adjust effectively to shocks associated
with changes in economic conditions, as long as the shocks are not cor-
related across the local industries (Mills 1972a, b). This third observation
of Marshall therefore also suggests that industrial clustering allows both
firms and workers to reduce the risk associated with investment. As such,
this effect can be understood as a portfolio effect and the evidence for this
can be easily found in the analysis of the risk premia associated with differ-
ent types of the real estate markets (Mills and Hamilton 1994).
The Marshallian mechanisms which underlie agglomeration processes
are neatly described by Duranton and Puga (2004) as reflecting processes
of learning, sharing and matching. Taken together the combined local
existence of these processes implies that the rates of return on capital will
tend to be maximized in areas characterized by industrial clustering. This
is because clustering itself provides a mechanism for circumventing many
market failure characteristics which are endemic in real-world markets.
5.2.2
Localization and Urbanization, Peripherality and Competition
Other aspects of these clustering processes have been discussed by a range
of commentators. Three different perspectives which are important for
our analysis, namely those of Ohlin-Hoover, Vernon and Porter, will be
shortly summarized here below.
The first additional perspective to agglomeration and clustering which
we need to consider follows the work of Ohlin (1933) and Hoover (1937,
1948). The Ohlin-Hoover schema ascribes agglomeration economies on a
