Keywords of post-fordist capitalism. Flexibility Specialization Cluster (network) Spatial agglomeration External economies

Transcription

1 Keywords of post-fordist capitalism. Flexibility Specialization Cluster (network) Spatial agglomeration External economies

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3 Why spatial agglomeration? Which are the forces of regional economic development and competitiveness?

4 Basic concepts Economy of scope The average total cost of production decreases when there is an increasing variety of goods produced (complementary goods). Economy of scale The cost advantage that arises with increased output of a product. Agglomeration Benefits that come when firms and people locate near one other together. Urbanization economy The size of a city leads to an increase in productivity. Localization economies Specialized economic environments. Externality A cost or benefit incurred or received by a third party who has no control over the factors that created the cost or benefit. Spillover Even if benefit or costs have been internalized (no more externality) the phenomena is still occurring.

5 Marshall(1890) - Arrow(1962) -Romer(1986) Externality concerns with knowledge spillovers between firms in an industry. Local monopoly is better because it directs the flow of ideas and internalized the externality.

6 The Marshall-Arrow-Romer (MAR) externality is about knowledge spillovers between firms in a specific industry. We have an early formalization by Arrow (1962) and a following work by Romer in First applied to cities by Alfred Marshall (1890), this approach states that the concentration of an industry in a city helps knowledge spillovers between firms and, therefore, the growth of that industry (a single sector) and of that city. A good example would be computer chips in Silicon Valley. Through spying, imitation, and rapid inter-firm movement of highly skilled labour, ideas are quickly disseminated among local firms. The MAR theory also predicts, as Schumpeter (1942) does, that local monopoly is better for growth than local competition, because local monopoly restricts the flow of ideas to others and so allows externalities to be internalized by the innovator. When externalities are internalized, innovation and growth speed up. (Glaeser et al., 1992)

7 Porter (1990) Porter s externality are maximized in cities with geographical specialized, competitive industries. Local competition fosters the pursuit and rapid adoption of innovation (imitation and improvement).

8 Jacobs (1969) Most important knowledge transfers come from outside the core industry (cross-fertilization of ideas). Variety and diversity of geographically proximate industries promote innovation and growth (more interchange of different ideas). Local competition speeds up the adoption of technology.

9 Summary Three different theories of dynamic externalities that try to explain how regions form and why they grow. MAR Porter Jacobs Monopoly Competition Competition Specialization Specialization Diversification

10 The contribute of P. Krugman and the New Economic Geography P.R. Krugman studied international economy but, unlike most economists

11 he thinks that is very simple to see how geography is important in economy. 11/05/2015 NEG Pagina 11

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13 During 1990, P. Krugman founded the «New Economic Geography» NEG is a recent body of literature that seeks to explain how resources and production come to be concentrated spatially. The defining issue of the New Economic Geography is how to explain the formation of a large variety of economic agglomeration (or concentration) in geographical space. In fact, agglomeration or the clustering of economic activity occurs at many geographical levels, having a variety of compositions [Fujita and Krugman]. 11/05/2015 NEG Pagina 13

14 Questions in New Economic Geography (what s new?) Questions emblematic of the literature are: Why as late as 1957, was 64% of U.S Manufacturing employment concentrated in Northest and Eastern Mid-West of United States of America? Why, as late as 1980, was 40% of Mexico s manufacturing concentrated in Mexico City? Why and when does manufacturing become concentrated in few regions, leaving others relatively underdeveloped? 11/05/2014 NEG Pagina 14

15 Nobel Prize! 2008 for his analysis of trade patterns and location of economic activity «He integrated the previously disparate research field into a new, international trade and economic geography» Titolo Presentazione Pagina 15

16 Before set up the model Krugman s proposal I shall offer a somewhat different approach aimed at answering a somewhat different question. Instead of asking why a particular industry is concentrated in a particular area I shall ask why manufacturing in general might end up concentrated in one or a few regions of a country, with the remaining regions playing the peripheral role of agricultural suppliers to the manufacturing core. The proposed explanation correspondingly focuses on generalized external economies rather than those specific to a particular industry 11/05/2015 NEG Pagina 16

17 He does not assume the existence of a center and a periphery but he explains how two regions that are identical in the beginning can have a very different pathway of development leading to the emergence of a central region and a peripheral region. He wants to show how large-agglomeration could emerge. Some regions may have some objective advantages of the first-nature kind (natural resources, climate, geographic location): this can justify their success and the local agglomeration of economic activities. Some other regions may also develop a second-nature advantages: a region attracts new businesses simply because it is already home for many. According to Krugman, the agglomeration process may be a consequence of the interplay between economies of scale and increasing returns to scale, transportation costs and factor mobility. 15/05/2018 NEG Pagina 17

18 Forces affecting concentration Centripetal Forces Market size effects (linkages) Thick labor markets Pure external economies Centrifugal Forces Immobile factors Land rents Pure external diseconomies The centripetal forces listed in the first column are the three marshallian sources of external economies: local pool of specialized labor; ancillary and supporting trades; inter-firm division of labor. Source: Krugman, The role of geography and development, International Regional Science Review, 22, 2, 143.

19 The centrifugal forces in the second column of Table 1 are less standard but offer a useful breakdown. Immobile factors, certainly land and natural resources. Concentrations of economic activity increase the demand for local land, driving up land rents and so discouraging further concentration. And concentrations of activity can generate more or less pure external diseconomies such as congestion.

20 Key elements of Krugman s model.. in general: Transport costs Increasing returns to scale 11/05/2015 NEG Pagina 20

21 Why transport costs are relevant? Transport costs Goods produced in one particular economy.cannot be consumed in other economy with the same costs. Goods produced in one place can be consumed in another place only if they are trasported. But not all goods can be trasported..(for istance,services provided by an hospital..). And..when transport is possible, it is necessary to support a charge. In this case, the cost will depend on the DISTANCE between the place of production and the place of consumption. Assuming that there are only two markets, this would mean that for every firms, there are two markets. Domestic Market: where price of sales coincides with cost of production. External Market: where price of sales concides with the sum production costs and transport costs. 11/05/2015 NEG Pagina 21

22 Increasing returns to scale and economies of scale 1 In economics, RETURNS TO SCALE and ECONOMIES OF SCALE are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm). The term RETURNS TO SCALE arises in the context of a firm's production function. It explains the behavior of the rate of increase in output (production) relative to the associated increase in the inputs (the factors of production) in the long run. In the long run all factors of production are variable and subject to change due to a given increase in size (scale). While economies of scale show the effect of an increased output level on unit costs, returns to scale focus only on the relation between input and output quantities. 11/05/2015 NEG Pagina 22

23 Increasing returns to scale and economies of scale 2 COSTANT RETURNS TO SCALE: a production function exihibts costant returns to scale if changing all inputs by a positive proportional factor has the effect of increasing outputs of that factor. INCRESING RETURNS TO SCALE: a production function exihibts increasing returns to scale if changing all inputs by a positive proportional factor has the effect of increasing output by more then that proportional change in inputs. In general..under PERFECT COMPETITION The firm can be ECONOMIES OF SCALE if and only if it has INCREASING RETURN TO SCALE..this implies increasing levels of production are related to decreasing levels of costs. 15/05/2018 Titolo Presentazione Pagina 23

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25 Set up - The model - Two regions (1 and 2) at a certain distance; - Two sectors (A-agriculture M-manufacturing); - Two factors (only labor), each of one is specific to one sector - L a and L b represent the economy-wide supplies of the two factors farmers and workers. These supplies are fixed. They are, however, allocated across locations. - The peasant population is assumed completely immobile between regions; each region will have a peasants supply: (1 - u)/2 - The workers can move (Workers are assumed to move toward locations that offer them higher real wages). If L1 and L2 are the workers supply in regions 1 and 2. L1+L2= u The salary for L1 is W1 and for L2 is W2

26 Assumptions about transport costs - Transportation of agricultural output is assumed to be COSTLESS; - Transport costs for manufactured goods will be assumed to take Samuelson's ICERBEG" form, in which transport costs are incurred in the good transported (Specifically, of each unit of manufactures shipped from one region to the other, only a fraction π< 1 arrives. This fraction π is an inverse index of transportation cost). - Where z is the amount of goods that arrives; - Where the transport is from j to k and Djk is the distance - Where π is the transportation cost

27 - Agriculture is a constant-returns sector tied to the land: thus the farm labor used in producing any unit of agricultural good (at location j) is assumed equal to production: L A =Q a There is one single homogeneous agricultural goods. - Manufacturing involves economy of scale, with a fixed cost for any variety produced at any given location: L Mi =α + βq Mi i is a type of good, Q is the quantity of good i, L M is the labor used in producing I α is a fixed cost (responsible of the economy of scale) β is the constant marginal cost Manufactures is composite of a large number of N product variaties.

28 Assumptions about monopolistic competition In any model in witch increasing returns play a crucial role, one must somehow handle the problem of market structure. [] Dixit Stiglizt monopolistic competition is grossly unrealistic, but it is flexible and tractable.

29 Suppose now, that a NEW PROFIT opportunity in one region induces entry there of an additional monopolistically competitive firms and hence production of an additional variety. - Competition effect: the entry of a new firm, on the one hand reduces the market share of other companies, on the other hand reduces the price of the goods produced, with the effect of reducing the profit on the local market and make the location less profitable. - Demand effect: the entry of a new firm, increases the demand for labor. Nominal wages increase. Workers move toward this location new popolation! more demand! new profit opportunity! 11/05/2015 NEG Pagina 29

30 The two effects have opposite influence on the profitability of the new location! Krugman s model consider multiple equilibria - Competition effect > Demand effect NO AGGLOMERATION! - Demand effect > Competition effect AGGLOMERATION! It depends on some parameters: - Demand elasticity; - Transport costs; - Economy of scale; 11/05/2015 NEG Pagina 30

31 Two forces working toward divergence (agglomeration), according to Krugman: - The home market effect - The price index effect These are centripetal forces, the forces that work for agglomeration And one working toward convergence: - The degree of competition for the local peasant market This represents a centrifugal force, the force that works against agglomeration

32 What about the transportation cost and the parameter τ? (τ is the fraction of a good shipped that arrives) According to Krugman, concentration is more likely when trasport costs are low.

33 Examples with different parameters In both cases σ=4; μ=0.3 τ is = 0.75 in the first case (low transportation costs) is = 0.50 in the second case (high transportation costs) In the high transport-costs case (0.50) the relative wage declines as f rises (f=l 1 / μ). We would expect to see regional convergence. In the low transport-costs case, the slope is the opposite, so we would expect to see regional divergence (agglomeration).

34 Basically, when transport costs are sufficiently low it is worthwhile for manufacturers to concentrate their production geographically so as to realize economies of scale. Once they have decided to concentrate production, however, the optimal location is one that other producers have also chosen. So low transport costs foster agglomeration. Agglomeration is favored by low transport costs (low τ), a large share of manufacturing in the economy (high μ) and strong economies of scale at the level of the firm». (Krugman, 1992, p. 27)

35 Relationship between regional manufacturing populations and real wages with varying transport costs Source: Krugman P., The role of geography in development, International Regional Science Review, 1999, p. 148

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