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Agglomeration and regional growth policy: externalities versus comparative advantages

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Abstract

This paper explores the existence of different types of static and dynamic externalities and shows the relationship between externalities, interregional trade, and cluster policy. By guiding policy in choosing the most appropriate strategy for facing some frequent dilemmas, this paper has clear implications in regional development policy and adds to the existent literature in three ways. First, it contributes to a better characterization of dynamic externalities by extending the “advantages of backwardness” approach, formerly developed to explain the catching-up of national economies, to the regional context. Second, the paper presents a new model that relates static and dynamic externalities to the clustering mode of production in the regional context. Third, the paper contributes to give a more accurate theoretic basis to the regional cluster policy and to help policy-makers in choosing the right policy for increasing the well-being of depressed regions. The major conclusion is that policy must pursue a combination of the comparative advantage principle with one type of dynamic externalities uncovered in this paper: the “related variety benefits” of agglomeration.

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Notes

  1. Porter’s diamond model considers the following as the most important factors for explaining the competitive advantage of nations: (i) the context for firm strategy and rivalry; (ii) demand conditions; (iii) factor conditions; and (iv) related and supporting industries.

  2. Gordon and McCann (2000) suggest three basic models of cluster processes: agglomeration economies, industrial complex, and social networks. Each of these models produces cluster benefits in very different ways. But, as these authors have recognized (2000: 528), “actual clusters may contain elements of more than one type.”

  3. Of course, cluster development is not the only option for local and regional development (Karlsson 2008b). There are other alternatives to cluster policies for stimulating regional economic growth, and it has been alleged that many of them are also responsible by positive externalities: investments in machines and equipment (DeLong and Summers 1991), infrastructures (Barro 1990), human capital (Lucas 1988), and R&D (Romer 1990). The question of finding the most effective of these policies in pulling the economic growth is empirical in nature and is therefore beyond the scope of this paper.

  4. These prescriptions are synthesized in Woodward and Guimaraes (2009): (i) supporting the development of all clusters, not choosing among them; (ii) reinforcing established and promising clusters rather than attempting to create entirely new ones; (iii) cluster initiatives are advanced by the private sector, with government as facilitator; (iv) development should not be guided by top-down policy strategies.

  5. For a review of the theory of firm location decisions and the dynamic of industrial clusters, see Maggioni (2002, especially Chap. 3). Trying to give some order to the “conflicting conceptualizations” and “generated ambiguity,” Karlsson (2008a) reviews the models and origins of clusters.

  6. A convenient assumption used in monopolistic competition models consists of considering that firms prefer localizations near households and vice versa, as in Fujita (1988).

  7. For a deeper discussion of the character and role of pecuniary and technological externalities, see Johansson (2005). David and Rosenbloom (1990, p. 349) explore, in a stylized approach, agglomeration pecuniary externalities “that tend to reduce the prices at which primary inputs can be purchased as more and more of those inputs come to be assembled at the locale in question.”

  8. For a discussion of agglomeration economics, and specifically of the importance of clustering and agglomeration, see McCann (2008).

  9. While the expression “related industries’ is used by many authors (Scherer 1982; Morris 1990; Feldman and Audretsch 1999; Porter 2000) with different meanings, the “related variety benefits” is used in this paper as derived from “industry relatedness” with the meaning given by Neffke and Henning (2009): the extent to the knowledge and skill base of two industries overlap.

  10. This also explains why the relevant distinction, at the microlevel, between external economies of scale and scope (Goldstein and Gronberg 1984; Parr 2002) is not considered in Table 1.

  11. The term Marshall–Arrow–Romer (MAR) externalities, which relates to technological spillovers between the firms within an industry, was coined by Glaeser et al. (1992) when they added the Arrow’s (1962) formalization of learning and the Romer’s (1986) contributions regarding the impact of dynamic knowledge accumulation to the Marshall’s (1920) seminal idea of localization economies. Storper (2009) disputes the MAR concept, arguing that the true Romer’s sources of increasing returns are not in essence local.

  12. The reasons why some regions have more learning capability than others are varied: (a) some types of activities can be more prone to knowledge spillovers than others; (b) regional clusters with strong industry–institutional linkages can increase the region’s capacity to absorb knowledge spillovers; (c) the embodied capabilities of the labor force are not the same across regions, given not only different levels of formal education but also the industry-specific tacit knowledge; (d) different regional endowments of entrepreneurial talent.

  13. These are some reasons why one can consider the “death of geography” thesis as “exaggerated” (Morgan 2004), although proximity must not be considered only in terms of geographical distance (Boschma 2005).

  14. According to Porter (1990), it is local competition, as opposed to local monopoly, that promotes the pursuit and rapid adoption of innovation.

  15. The negative correlation between the initial productivity level and productivity growth rate is also stated in the neoclassical growth theory (see Barro and Sala-i-Martin 1992); however, the “advantages of backwardness” approach calls attention to other factors that are absent from the neoclassical theory.

  16. One of such adjustments is related to the mobility factor: labor mobility is higher across national regions than across countries.

  17. The concrete process of allocation is not important. Given the general assumptions formulated, the conclusions will be the same if there is a central planning authority or if allocation is done by market.

  18. Recall that we use labor in R as the numeraire.

  19. Of course, the amount of benefits depends also on the absorptive capacity of the \(P\) economy. However, for simplicity, we have opted for not introducing a new variable for controlling this effect. Besides, the inclusion of such variable would not change the main model conclusions.

  20. For a discussion about how cluster strategies work and the implications for theory and policy, see Karlsson (2008b).

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CEF.UP—Center for Economics and Finance at the University of Porto—is funded by the Fundação para a Ciência e Tecnologia (FCT), Portugal.

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Pessoa, A. Agglomeration and regional growth policy: externalities versus comparative advantages. Ann Reg Sci 53, 1–27 (2014). https://doi.org/10.1007/s00168-014-0625-1

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