WhyDoFirmsCluster?

Whydofirmslocateclosetooneanother?Localizationeconomies:firmsinanindustryclusterUrbanizationeconomies:firmsindifferentindustriesclusterFirmsclustertoShareintermediateinputsSharealaborpoolGetbettermatchesofworkersandlabortasksShareknowledge3-23-33-43-5ClusteringtoShareIntermediateInputsAnExample:DressmakersproducehighfashiondressesRapidchangesinfashionandoutput:Firmsaresmall&nimbleScaleeconomiesinbuttonslargerelativetodemandofsingledressmakerFacetimerequiretodesignandfabricatebuttonstofitdressesDressmakersshareabutton-maker,andclustertofacilitatefacetime3-63-7AnotherExample:High-TechnologyFirmsRapidlychangingproductsnecessitatesintermediateinputsElectroniccomponentsTestingfacilitiesFirmsshareintermediateinputsupplierstoexploitscaleeconomiesFacetimeindesignandfabricationrequiresproximityandcluster3-8Self-ReinforcingEffectsofClusteringTheTradeoffsBenefit:LocalizationeconomiesreducecostofintermediateinputCost:CompetitionforworkersincreaseslaborcostStartingwithisolatedfirms,willaclusterform?Howmanyfirmswilljointhecluster?3-93-10ClusteringtoShareaLaborPoolVaryingdemandforeachfirm:Software&TVprogramsFixedindustry-widedemand:zero-sumchangesindemandacrossfirmsExample:successofonefirm’sGISsoftwareatexpenseofothersLocationalequilibrium:Wageincluster=expectedwageinisolatedsite=$103-113-123-13ComputingProfitsLaborDemand:marginalbenefit=revenuecontribution=MRPProfitfromanindividualworker=MRP-wageProfitfromworkforce:TrianglebetweendemandcurveandwagelinePanelA:Expectedprofitforisolatedfirm=$48PanelB:Expectedprofitforisolatedfirm=(1/2)?($147+$3)=$753-14MovetoClusterIncreasesExpectedProfitHighdemand(goodnews):moreprofitinclusterbecauseoflowerwageandmoreworkersLowdemand(badnews):lessprofitinclusterbecauseofhigherwageGoodnewsdominatesbadbecausefirmsrespondtochangesindemandHighdemand:hiremoreworkerstoexploitlowerwageinclusterLowdemand:hirefewerworkerstocushionblowofhigherwageincluster3-153-16ClusteringtoFacilitateLaborMatchesFirmsandworkersnotalwaysperfectlymatchedMismatchesrequiretrainingcoststoeliminateskillgapShowthatlargercitygeneratesbettermatches3-17AModelofLaborMatchingWorkershavevaryingskillsoncircleEachfirmentersmarketwithaskillrequirementonunitcircleWorkersincurtrainingcosttoclosegapScaleeconomiesinproduction:2workersperfirmMonopolisticcompetition:Zeroeconomicprofit&Wage=MRPCompetition:UnrestrictedentrygenerateszeroeconomicprofitFirmsaredifferentiatedwithrespecttoskillrequirementFirmsofferwageandworkersaccepthighestnetwage3-183-193-203-21ClusteringtoShareKnowledgeFirmsinanindustryshareideasandknowledgeMysteriesoftradeare“intheair”Innovationsarepromptlydiscussed,improved,andadopted3-22EvidenceofKnowledgeSpilloversSpilloversmoreimportantinideaindustriesMostinnovativeindustriesarethemostlikelytoclusterSpillovershaverangeofafewmiles3-23EvidenceofLocalization:Productivity&BirthsHigherLaborProductivityHenderson:Elasticity(outputperworker,industryoutput)=0.02to0.11Mun&Huchinson:Productivityelasticity=0.27FirmBirthsCarlton:Elasticity(births,industryoutput)=0.43Head,Reis,Swenson:JapaneseplantsclusterRosenthal&Strange:birthsmorenumerousinlocationsclosetoindustryconcentrations3-24EvidenceofLocalization:EmploymentGrowthHenderson,Kuncor,Turner:growthmorerapidclosetoexistingconcentrationsRosenthal&Strange:rapidgrowthclosetolocationswithexistingjobsLocalizationeconomiesattenuaterapidly3-25UrbanizationEconomiesAgglomerationEconomiesAcrossIndustriesResultinlargediversecitiesSharing,Pooling,andMatchingIntermediategoods:businessservices(banking,accounting),hotels,transportservicesPooling:WorkersmovefromindustrieswithlowdemandtoindustrieswithhighdemandMatching:Commonskillsandinter-industrymatching,e.g.,computerprogrammers3-26CorporateHQandFunctionalSpecializationCorporationsclusterincitiestosharefirmsprovidingbusinessservicesLargecitiesincreasinglyspecializedinmanagerialfunctionsSmallcitiesincreasinglyspecializedinproduction3-27UrbanizationEconomiesandKnowledgeSpilloversDiversecityisfertilegroundfornewideasBulkofpatentsissuedtopeopleinlargecitiesDisproportionatenumberofpatentcitationsfromsamecityLocalnatureofcitationsdecreasesovertimeasknowledgediffusedUniversitypatentsaremostfertile,followedbycorporatepatentsEvidenceofUrbanizationEconomiesElasticityofproductivityw.r.t.populationis0.03to0.08Diversitypromotesemploymentgrowth,especiallyininnovativeindustries3-28OtherBenefitsofUrbanSizeJointLaborSupplyLargecitiesofferbetteremploymentopportunitiesfortwo-earnerfamiliesHistory:metal-processingfirms(men)locatedclosetotextilemills(women)Current:powercoupl