Geography Reference
In-Depth Information
firm or sector basis into three categories, namely
internal returns to scale
,
localization economies
, and
urbanization economies
. Internal returns to
scale refer to the fact that some firms or organizations grow and become
large due to economies of scale in their own production processes, and
these firms often are located at one principal location. As such, a single
geographical place is the location for a large quantity of both workers and
capital investment. Obvious industry examples here are aircraft manufac-
turing, automobiles, electronics and even major software houses. Strictly
speaking, in Marshallian terms these are not agglomeration effects, as the
scale effects are internalized within the boundaries of a firm, rather than
being location-specific externalities which accrue to a co-located group of
business companies. We will return to this point in subsequent chapters, as
this is very important for our understanding of the behaviour and organi-
zation of multiplant and multinational firms, many of which are large.
The internal returns to scale exhibited by large firms point to the fact
that scale and co-location are often interrelated phenomena. Indeed, the
presence of large firms also often generates other externalities via several
channels and linkages - such as for example purchasing, sub-contracting,
outsourcing, joint ventures, and so on - on other firms in the same sector
in the same locality. These are referred to as localization economies; that
is, the agglomeration effects which accrue to a particular sector in a par-
ticular location and the fact that they operate between firms means that
they can be genuinely regarded as external effects. Moreover, in many
cases, such localization economies also work even without the presence
of a major dominant large firm, and this often occurs in clusters of small
firms in the same region and in the same industry.
Finally, the third form of agglomeration economies in the Ohlin-
Hoover schema are urbanization economies. These are the agglomeration
effects which accrue to a diverse group of industries all of which are co-
located. This is basically - although not exclusively - a city phenomenon,
and exists because in an urban environment people from a diverse range
of firms and organizations interact, thereby facilitating the processes of
learning, sharing and matching.
Another important approach to industrial clustering phenomena relates
to the work of Vernon (1960) and his emphasis on the product cycle.
The issues raised by Vernon's product cycle model as applied to multi-
national business and location have already been discussed in Chapter 2.
The insights on agglomeration economies were originally derived from
Vernon's work with Hoover (Hoover and Vernon 1959) on the economies
of cities and regions, and in particular on the economy of the New York
metropolitan area. Their original work on the spatial structure of the
New York city economy observed that in the central core areas of the city
