Bulba! <[EMAIL PROTECTED]> wrote: > True. I have a bit of interest in economics, so I've seen e.g. > this example - why is it that foreign branches of companies > tend to cluster themselves in one city or country (e.g.
It's not just _foreign_ companies -- regional clustering of all kinds of business activities is a much more widespread phenomenon. Although I'm not sure he was the first to research the subject, Tjalling Koopmans, as part of his lifework on normative economics for which he won the Nobel Prize 30 years ago, published a crucial essay on the subject about 50 years ago (sorry, can't recall the exact date!) focusing on _indivisibilities_, leading for example to transportation costs, and to increasing returns with increasing scale. Today, Paul Krugman is probably the best-known name in this specific field (he's also a well-known popularizer and polemist, but his specifically-scientific work in economics has mostly remained in this field). > China right now)? According to standard economics it should > not happen - what's the point of getting into this overpriced > city if elsewhere in this country you can find just as good > conditions for business. Because you can't. "Standard" economics, in the sense of what you might have studied in college 25 years ago if that was your major, is quite able to account for that if you treat spatial variables as exogenous to the model; Krugman's breakthroughs (and most following work, from what I can tell -- but economics is just a hobby for me, so I hardly have time to keep up with the literature, sigh!) have to do with making them endogenous. Exogenous is fine if you're looking at the decision a single firm, the N+1 - th to set up shop in (say) a city, faces, given decisions already taken by other N firms in the same sector. The firm's production processes have inputs and outputs, coming from other firms and (generally, with the exception of the last "layer" of retailers etc) going to other firms. Say that the main potential buyers for your firm's products are firms X, Y and Z, whose locations all "happen to be" (that's the "exogenous" part) in the Q quarter of town. So, all your competitors have their locations in or near Q, too. Where are you going to set up your location? Rents are higher in Q than somewhere out in the boondocks -- but being in Q has obvious advantages: your salespeople will be very well-placed to shuttle between X, Y, Z and your offices, often with your designers along so they can impress the buyers or get their specs for competitive bidding, etc, etc. At some points, the competition for rents in quarter Q will start driving some experimenters elsewhere, but they may not necessarily thrive in those other locations. If, whatever industry you're in, you can strongly benefit from working closely with customers, then quarter Q will be where many firms making the same products end up (supply-side clustering). Now consider a new company Z set up to compete with X, Y and Z. Where will THEY set up shop? Quarter Q has the strong advantage of offering many experienced suppliers nearby -- and in many industries there are benefits in working closely with suppliers, too (even just to easily have them compete hard for your business...). So, there are easily appreciated exogenous models to explain demand-side clustering, too. That's how you end up with a Holliwood, a Silicon Valley, a Milan (for high-quality fashion and industrial design), even, say, on a lesser scale, a Valenza Po or an Arezzo for jewelry. Ancient European cities offer a zillion examples, with streets and quarters named after the trades or professions that were most clustered there -- of course, there are many other auxiliary factors related to the fact that people often _like_ to associate with others of the same trade (according to Adam Smith, generally to plot some damage to the general public;-), but supply-side and demand-side, at least for a simpler exogenous model, are plenty. Say that it's the 18th century (after the corporations' power to stop "foreign" competition from nearby towns had basically waned), you're a hat-maker from Firenze, and for whatever reason you need to move yourself and your business to Bologna. If all the best hat-makers' workshops and shops are clustered around Piazza dell'Orologio, where are YOU going to set up shop? Rents in that piazza are high, BUT - that's where people who want to buy new hats will come strolling to look at the displays, compare prices, and generally shop. That's close to where felt-makers are, since they sell to other hat-makers. Should your business soon flourish, so you'll need to hire a worker, that's where you can soon meet all the local workers, relaxing with a glass of wine at the local osteria after work, and start getting acquainted with everybody, etc, etc... Risk avoidance is quite a secondary issue here (except if you introduce in your model an aspect of imperfect-information, in which case, following on the decisions made by locals who may be presumed to have better information than you is an excellent strategy). Nor is there any "agency problem" (managers acting for their interests and against the interest of owners), not a _hint_ of it, in fact -- the hatmaker acting on his own behalf is perfectly rational and obviously has no agency problem!). So, I believe that introducing agency problems to explain clustering is quite redundant and distracting from what is an interesting sub-field of (quite-standard, by now) economics. There are quite a few other sub-fields of economics where agency problems, and specifically the ones connected with risk avoidance, have far stronger explicatory power. So, I disagree with your choice of example. Alex -- http://mail.python.org/mailman/listinfo/python-list
