History has witnessed through the ages that business houses or firms of one type tend to concentrate in one particular location only. Flourishing of electronic goods in Tokyo (Japan), thriving of the education industry in Bangalore (India), or the spread of agriculture in eastern and southern areas of England (UK) might be some relevant examples. Several reasons have been cited by economists and business experts for the same. Among them, “locational competitiveness” is the most notable one.
Entrepreneurs claim that they tend to join an existing cluster of industries in a given region because of the scope of competition posed by their contemporaries. Competition helps them to grow by attracting more consumers, increasing greater challenges to survive in the market and providing the required facilities for production without much investment. The founder and the CEO of the Kahn Research Group (North Carolina), Greg Kahn, opines that the best location to set up a new business is the one that’s situated as close to the competitor as possible. Kahn further reflects that because the competitors have already done the demographic surveys before settling there and have most likely chosen the place so as to reach widely to the customers, then locating there will keep the advertising costs at minimum. In Kahn’s own words, “why spend the money when they’ve already (spent it) for you?”
The term “competitive cluster” was first introduced by Michael Porter in his book “The Competitive Advantage of Nations” in 1990. According to Porter, these industrial clusters cause competition to increase in three ways: raising the productivity, encouraging new firms to enter the market and giving way to innovation. The concept of a relationship existing between Geography and Economics was however examined in detail by the renowned economist Paul Krugman in his book “Geography and Trade” in the year 1991.
Krugman studied the concentration of manufacturing sector of industries in the north-eastern part of USA at great length. He used Mathematics to derive a relationship among the economies of scale, transportation costs and “footloose” production. The conclusion was that if the returns from the industry (economies of scale) are very large and are on an increasing trend (IRS); the costs of transporting to other regions are low; and a large proportion of the total population in that region is engaged in the industry, then the firms of that industry will locate in that region only. The returns are large because the costs are very low owing to the availability of all the required infrastructure and facilities within that region.
Thus, the competition basically keeps the price of the products stable and at reasonably low rates, drawing customers in large numbers to that region. Consumers buy that particular good from that region only (assured of the quality and the price), i.e., the demand is also likely to be huge at the place where most of the firms are located. In short, “firms want to locate where the market is the largest and the market is the largest where the firms locate”.
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