Bulba! <[EMAIL PROTECTED]> wrote: ... > First, even though I disagree with you in places, thanks for > this reply - it enhanced my knowledge of the topic in some
You're welcome! > What you wrote regards especially strong the industries you pointed > at: fashion, jewellery, esp. I think in those industries those factors > may be decisive. When this street is renown in the city to have > "good jewellers" located there, the choice for a new jeweller in this > city is almost like this: get located there or die. > > However, I'd argue that industries with those kinds of dependencies > are actually pretty rare. And yet the phenomenon appears in quantitatively similar ways (to different scales) in many industries where either the supply side or demand side benefits of clustering apply. > >Now consider a new company Z set up to compete with X, Y and Z. Where Ooops, typo, sorry, call the new company T!-) > >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...). > > I grant that this model is neat and intuitive - but I'd argue it is > not very adequate to real world. Read on. Apart from its being exogenous (the model does not try to explain why X Y and Z were already located in Q -- only why, given this state of affair, T has advantages to setting things up in Q, too, which may well offset the costs such as higher rents), I don't think so -- but, I _am_ reading;-). > >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 will only be true if the hats from Piazza dell'Orologio are much > better than elsewhere. No, this is not necessary (it's not even strictly necessary that they're _believed_ to be better, say because they traditionally were). A sufficient inducement to the would-be customers to go shopping there rather than elsewhere is that in that Piazza they get more choices for the same effort, so shopping there is more effective. Say that the city has ten hat shops of the same quality. One is in Piazza dell'Unita`, all the way to the Northern border of the city. One is in Piazza Saragozza, all the way to the Southern border. The other eight are in Piazza dell'Orologio, smack in the middle of downtown. Each shop offers hats taken from the same random distribution: we can say that a normal curve measuring the utility function for the customer (some function of price, quality, looks, fit, ...), with identical average and variance, represents the best hat available today from a given shop from the POV of a given customer. Say that a customer has one day to shop for their new hat, and the locations are too far apart for a customer to visit more than one location within that day. If a customer chooses to visit the one southern shop, or the one northern shop, the customer expects to be presented with the choice of hat from said normal curve. If the customer goes downtown, they expect a choice which overall lies along a DIFFERENT curve -- the best-of-eight samples from the normal curve. Sorry I can't model that analytically, but both intuitively and from any little simulation (easy to code in Python) you can see the customer's expectations are much better if they choose the location where they can do more comparison shopping! If you change this handwaving into numbers you can model this demand-side push of hatsellers towards clustering vs the forces pushing in the other direction, such as the supply-side issue of higher rents which may be assumed, all other things being equal, to make each shop's curve slightly _worse_ in the downtown location (higher costs, all other things being equal, must mean higher prices). It's not just fashion. I can look at the historical location of fishmongers in Bologna, still to some extent observable today, and I see them generally spread all over BUT with two obvious centers of downtown aggregation: a minor one at the Mercato delle Erbe (center-south side of downtown) and a major one at via Pescherie Vecchie (which just happens to mean "street of the Old Fishmongers" -- that concentration goes back many, many centuries). When I'm just getting, say, some fresh anchovies to fry for a pasta sauce, I'm likeliest to shop at a fishmonger near my home (the University side of downtown, northerly) or get them as part of a generic grocery shopping trip at a supermarket. But sometimes I'm preparing for a meal where fish plays a big role, maybe with company, and then I want the best, and then I head for Pescherie Vecchie. It's always very crowded with shoppers there, particularly at the times when people are likeliest to be shopping for fresh fish. It's obvious to even the most casual observer that just the same mechanism is at play: there are demand-driven centripetal forces because shoppers sometimes like to comparison-shop and get a lot of choice. This demand-side process doesn't operate much for "commodities" -- goods with quality and prices so flat and standardized that comparison shopping does not matter much. Much fashion-industry ware is that way, spewed out at commodity levels by the same factories. Some concentration may nevertheless remain for purely historical reasons: I'm thinking for example of the concentration of bookstores in Charing Cross Road, and of electronics shops in the nearby Tottenham Court Road, in London. Being in London only rarely nowadays, if I'm shopping for books I'm likely to head for Charing Cross, because I know I'll get choice; if I was a resident, though, and shopped for books often enough, I guess I'd find out about other places that may be cheaper or otherwise better. In any case, this more detailed demand-side sketch already shows that transaction costs are the key consideration in explaning clustering. Considering that they're also key in the very EXISTENCE of firms, according to standard economic theory, it's hardly surprising that they should play a large role in shaping the firm's foundational decisions, including, of course, location. But the demand-side model focuses on the _customers_' transaction costs, their advantage in comparison shopping. Similarly, a supply-side model can focus on suppliers' issues. Focusing within the firm, we can get insight on the pluses and minuses to the firm of being in a single place vs spreading itself around, but clustering of separate firms is clearly a different issue. > If the quality and prices of products converged, the gain for the > customers to go there isn't high. And the prices for customers > have to be higher, as the high rents drive some suppliers out, > so the supply of hats is lower, ergo customer prices are higher. ...which is why you know a priori that some equilibrium point is likely: there are costs as well as advantages to clustering (rents can often be an important slice of the costs, but other inputs that are costly to transport could also become scarce, though maybe not to the same point as land and suitable buildings and other fixed infrastructure). But there's nothing intrinsic to predict that the amount of clustering at equilibrium will be low. Transaction costs are often connected to acquiring and checking information; "knowing" (or believing one knows) where the hatsellers are may be enough of an advantage to maintain a clustering, once it's historically formed, even when you can hardly find any more present evidence of materials-costs advantage to it... the information-cost part of the transaction costs may well suffice. > >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... > > That is true in the model. However, I don't find it very true > in practice in a lot of industries: > > - "physical proximity" in this city very often means navigating > through jammed roads, so the transportation costs in terms of > time and money may very well increase rather than decrease by > locating "in a cluster", even though physical distance may > be smaller. physical distance != temporal distance & a cost > of getting there. Congestion can be a part of transaction costs, sure, just as higher rents can. But if your suppliers or customers are clustered in Hollywood, or the City of London, etc, etc, you don't diminish your congestion-driven costs much by going elsewhere, as you still need to see your customers or suppliers often -- you just add the costs of getting to LA / London / etc to those of moving within it -- in this sense congestion costs behave very differently from rents. > - since everything is more expensive, so is labor; even > if you pay this worker a little bit less elsewhere, he might > find it more attractive to commute shortly to work and > have lower costs of living in a different area, so this very > well may work as a motivation to relocate Sure, you get more competition: just as it's easier for you to get your competitors' best people, it's easier for your competitors to get yours (to some extent this applies to other inputs, and customers too, but highly skilled labor is the key component in many industries). This raises general costs, roughly equally for all clustered competitors, but another factor may be more prevalent because it differentiates among competitors: if you think you're among the best company in your sector, a more desirable place for your competitors' best personnel to work, then you perceive clustering as desirable because of that; if you think you're an inferior company, so your best people are likely to want to flee, then you perceive clustering as undesirable. Thus, seeking clusters can send the message "we're the best"; avoiding clusters can send the message "we're not so hot". That's how situations of asymmetric information tend to work in economics -- and since Akerlof's seminal work "The Market for Lemons" is 35 years old, and he got the Nobel prize for it (and related work, of course) in 2001, I believe we can call this field reasonably classic by now. Note that I'm not saying there are no forces pushing against clustering: of course there are, varying by industry etc. But they're easy to overstate. Consider the highly skilled worker who has a choice: they can stay in some crowded cluster, say Silicon Valley, and keep facing congestion, high rents, etc, for high salaries and great opportunities to keep hopping to the highest bidder; or, they can accept an offer at a lower salary in some more isolated area, say a minor cluster such as Austin, Tx, and get less congestion, cheaper housing, etc, although also less opportunity to keep enhancing their careers. Which kind of worker will tend to pick which of the two? Somebody who thinks they may be past the peak of their career, and won't get many more lucrative offers in the future anywa, might be more tempted by (say) Austin, while somebody who's keenly competitive and on a sharp upwards path may keep braving the congestion for the (to them) attractive lures and challenges of Silicon Valley. Of course there are a zillion other factors, but in as much as we're talking about factors strictly related to clustering, this is the bias, and therefore (in an Akerlovian model) this is the message which tends to be sent by such choices. I.e., seeking clusters send a message "I'm the best", avoiding them sends "I'm not so hot", for the individual highly skilled worker as much as for the firm in some highly competitive industry. In as much as we live in a "superstar economy" clustering becomes more desirable because of such competitive pressures and messages. > - few large businesses nowadays have customers neatly > clustered in one location, they tend to sell countrywide > or worldwide; so the premium for getting into this expensive > place is low and the costs are high There are exceptions (monopsonies or oligopsonies) but for _large_ firms this generally holds. But a _branch_ of a large firm may be set up specifically to serve a geographically identified market, so the location decision for the branch need not reflect the overall firm's issues, but rather only those specific to said market. > - production nowadays tends to be geographically > distributed as well Not as much as you might think. For example, people who worry about programming jobs moving to India may not realize a vast majority of such jobs go to a SINGLE tiny "spot" within the huge expanse of India, for all of the usual reasons promoting clustering. > - communication costs and transportation costs are DRAMATICALLY > lower nowadays than they used to be (today it costs 1/80 [one > eightieth] to transport a kg of mass using an aircraft in > comparison to what it cost in 1930s; ditto for telecommunication). ...so in the '30s very VERY few goods moved by plane. Not that it's exactly _common_ nowadays to move most goods by plane, mind you; but sure, it's conceivable in some cases. But there are other transaction costs, mostly connected to the need for face-to-face interaction as being the most effective form. I've worked for a SW development firm which tried to coordinate development distributed across many locations via cheap video-based teleconferences spanning timezones from California all the way to India; I've done way more than my share of telecommuting and airport- and plane-hopping for development projects geographically distributed and/or mostly located far from the customers and/or other stakeholders; I know whereof I speak... > Consider real world examples: Microsoft in Redmond or Boeing in > Seattle. Microsoft needs quite a lot of programmers. It would be > rather hard to find enough programmers born and educated in > Redmond, wouldn't it? Of course, or, at MS's scale, in any other single location. So, as they grew, they had to face the usual within-firm tension between the advantages of a single location and that of many; right now, quoting their careers webpage, they "employ more than 50,000 people worldwide, including offices in every major U.S. metropolitan city, and subsidiary offices in more than 60 countries.". For example, to attract the kind of highly competitive top-of-career high-tech worker that just will NOT leave the cluster of Silicon Valley, they chose to set up a new campus in Mountain View, CA, focusing on the convergence of entertainment and information technologies and industries; to attract the kind of European scholar who considers living in Europe a must and/or has no patience for the silly hassles put up by the US to keep foreigners out, Microsoft has an excellent Research laboratory at Cambrige, UK; and so on, and so forth. Of course, management-wise, there would be some great advantages to MS to having everybody at the Redmond campus, but even MS must deal with the real world, and the job market in particular: they're very pragmatic, so they get things in the Campus where they can, elsewhere when they must. How a large firm internally decides to site its various locations is really a separate issue from that of how different firms cluster, though of course there are many connections, particularly when you study the siting of one particular location. The two examples I give here are reasonably typical of a focus on supply-side and particularly the availability of highly skilled workers in high-tech areas... and then they show, again, the pluses of clustering. If Microsoft had found it easier to attract the kind of people they wanted, and build the needed connections to other firms in entertainment/information merging, outside the Silicon Valley cluster, there would be no reason for them to site there -- and instead you find them smack in the middle at Mountain View. > Boeing: Seattle?! Why Seattle? Doesn't Boeing sell most of its > new aircrafts in Washington? Obviously they agree with you, since their World Headquarters are in Chicago since over 3 years ago -- not exactly all that near to Washington, DC, but way closer than Seattle;-) "Why Seattle" has obvious purely historical answers -- they were born there, etc, etc. "Why Chicago" is a far more interesting question, since clearly the choice was way more open once they had decided that to keep expanding in Seattle was too costly or inopportune. You can find a lot about that specific decision on the web, of course. > AFAIK, in Europe Boeing does much of its production in > cooperation with Alena in Italy. From this viewpoint it really The spelling is "Alenia" (just in case somebody wants to google for more info). > doesn't matter much if Boeing is located in Seattle or anywhere > else in America really, does it? Not much, though flying to Chicago is marginally easier than flying to Seattle, it's not enough to matter;-) > Right here (Poland), most of the foreign corporations set up their > call centers in Warsaw, which is totally ridiculous given how > expensive that city is. Oh I can understand setting up a warehouse > by HP there because it's close to its biggest customers. But > I really see no good reason behind HP call center being located in > Warsaw, too, AFAIK (or at least that's the city code when I have > to call them sometimes). > > Most of the successful domestic companies I have observed here > have started and still operate in some God-forgotten provincial > towns, where land and labor is cheap and when it comes to > highly skilled professionals, you have to "import" some or all of > them from elsewhere anyway, because not even a big city is > likely to have precisely all the kinds of ultra-specialized > professionals that you may need. And there's less crime, and > shuttling kids to school isn't a nightmare, and the costs of living > are lower. Plus there's less of other things to do, so your workers > tend to focus more on work. :-) I remember glancing at some costly booklet called something like "Poland Infrastructure Report" back when an employer was considering setting up a branch office somewhere in Poland (selling and customizing SW for the mechanical industry), and back then issues such as internet and other telecom access, easy availability of top graduates, ease for expatriates from Italy to live in the place for a while knowing only English and Italian, at most German and French, and not Polish or Russian, closeness to good international airports and other good transportation, closeness to partner firms and potential customers' decision-makers, all appeared to point to Warsaw, if I recall correctly. Mechanical engineers with some programming experience or viceversa, good translators, and good salespeople with connections in the mechanical industry, are not as ultra-specialized as all that, after all. > >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!). > > I find no justification in most of foreign companies setting up their > call centers in a ridiculously overpriced capital city - so from > my viewpoint the risk avoidance is the only explanation that is > left. The firm I was working for had a consensus decision-making process (even I was involved) and managers (and other employees) and stockholders were mostly the same people -- it wasn't all that large a firm at the time. Nobody needed to practice risk avoidance. The infrastructure advantages of Warsaw vs other locations loomed HUGELY large, judging of course from some consultants' reports purchased for the purpose -- it may look different to people living in the place, although I'd like to get a second opinion from Warsaw's Chamber of Commerce since you appear to have a very specific individual bone to pick (and I can sympathize: even though Milan may be the economically correct choice for foreign investors, I'd never want to LIVE there myself, being a Bolognese... but I must admit that Milan's infrastructure, connections, location, etc, etc, may in several cases drive a rational decision to set up there). > Not all corporations do that: in this country Coca-Cola has made > their big "green field" investment almost in the middle of nowhere > in this country. GM, Volkswagen, FIAT, and most of other carmakers > have made similar decisions. Doesn't seem like those were bad business > decisions for them. If their needs were for cheap land for greenfield factories, and cheap workers for said factories, then they were acting under very different forces than a midsize company looking to set up a mostly-sales branch office, not an industrial factory. > The cluster I've seen - an IT "corporate area" in Dublin, > Ireland - was specifically created not due to "natural clustering", > but due to govt policy of tax breaks and preparing good > infrastructure in this place rather than some inter-business and > inter-customer dependencies, since e.g. Microsoft (where the company > sent me for training) neither is able to get all the workers it needs > just from this city, nor it sells mostly to local customers, but it > sells all over Europe. That's addressing only the issue of endogenous vs exogenous original causes for clustering. Many attempts to create clusters artificially have happened ever since the economical advantages of clusters were discussed in the literature, together with the crucial point that WHERE the cluster originally happens is in most cases almost random, it's self-reinforcing once it's properly underway. Most such attempts have failed, because governments' powers aren't unlimited; Dublin is a good example of this strategy succeeding. No matter WHY the good infrastructure is there, the tax breaks, the thriving community of high-tech workers, etc, a firm deciding where to set up may perfectly well find it rational to have all of these advantages overwhelm the issues of rents, congestion, competition for good workers. In other words, my disagreement with your thesis that, because the government lowered taxes, taking advantage of that is NOT in the best interests of a firm's stockholders, is now maximal: I find your thesis not just wrong, but by now outright silly. > To me, the issue of manager having to face their superiors > asking him a question - "why on Earth have you decided > to locate our branch in the middle of nowhere in this country? > Why not in capital city? Can't you look at the map? Read some > stats how many inhabitants this city has and what is the > income level there?" is overwhelming: it would take long > time to explain for this manager who e.g. may have already You are wrong, because the same decisions get rationally made by sole-owner sole-manager companies where these considerations cannot apply. Deciding where to site an imporant branch is a BIG decision: of course it takes a long time, *DUH*, and all sorts of factors are taken into consideration. > got his hands dirty in this industry in that country to know > that say, there's little revenue increase to be gained in > locating the facility in capital city, the needed workers are > actually hard to find there, etc. So all of these factors are folded into a huge pile of reports in companies where such decisions are at all likely to be challenged later, and sign-off on the folders is carefully obtained for cover-up purposes. If the local development agencies of the "middles of nowhere in that country" don't do their job, including showering managers planning such decisions with supporting materials, that's a bad sign: maybe due to cultural influences foreign capital, professionals, and managers are NOT welcome there as they would be in a relative metropolis, for example. This is (or was not too long ago) surely the case for some rural parts of the British Islands, and Italy too. It's perfectly rational and consone to stocholders' interests to take this into account and site where you KNOW you'll be welcome. > To me, this is much like decision whether do much of > development in Python or MS VS / VB. "But everybody's > using VisualStudio / VB" is a simple and compelling argument: > "so many people can't be wrong", while explanations that > going Python may actually be better decision in this context > requires long and complex explanations and managers oft can > not even be bothered to read executive summaries. The issue of parallels or otherwise is by now totally secondary, to me, to the main issue that I find your approach to explaining regional clustering problems across industries totally, irredeemably, and horribly WRONG. So, I'm not going to make the post even longer by even trying to address this part. Few, besides the two of us, can be left reading by now, and clearly our disagreements on economics are so total that it's unlikely we can get anywhere by our discussions anyway. > I feel econ models frequently are elegantly designed > abstractions of elegantly designed problems; the problem > is how close those are to the real-world problems. At > the end of the day, it's "human action" that gets all > of that implemented. I've seen too much resources > going down the drain in completely idiotic projects > and decisions to believe managers are rational beings. When you claim managers are acting rationally (if selfishly) to avoid risk to themselves, you can't then justify this claim by adding that they aren't rational at all. Economics does cover, in its modern form, both issues of agency problems (misalignment of incentives between agent and owner) AND ones of "bounded rationality" (all the way from asymmetric information, to transaction costs relating to acquiring and processing information). Trying to throw economics overboard because you can't be bothered to understand it is a kind of behavior that reminds me closely of the "leftists" you excoriate in your signature. Alex -- http://mail.python.org/mailman/listinfo/python-list
