Regional Regional EconomicsEconomics

Lecture 3Lecture 3

Sedef AkgüngörSedef Akgüngör

Cluster is, the logical pattern for units of an Cluster is, the logical pattern for units of an output-oriented activity whose markets are output-oriented activity whose markets are concentrated at one or a few locations, and concentrated at one or a few locations, and correspondingly for units of an activity oriented correspondingly for units of an activity oriented to inputs whose source locations are few. to inputs whose source locations are few.

There is a high concentration of producers and There is a high concentration of producers and suppliers of such theatrical inputs as actors, suppliers of such theatrical inputs as actors, stage designers, and theatrical makeup stage designers, and theatrical makeup specialists in Los Angeles and New York specialists in Los Angeles and New York because so much movie making and theater because so much movie making and theater activity is concentrated there. The making of activity is concentrated there. The making of vintage wines is confined to the relatively few vintage wines is confined to the relatively few areas where the right kinds of grapes will areas where the right kinds of grapes will flourish.flourish.

In New York, large advertising agencies are so In New York, large advertising agencies are so clustered along a section of Madison Avenue that clustered along a section of Madison Avenue that the street has given its name to the industry. the street has given its name to the industry.

Similarly, a section of Seventh Avenue is preempted Similarly, a section of Seventh Avenue is preempted by the garment trades, part of Forty-seventh Street by the garment trades, part of Forty-seventh Street by diamond merchants, and so on for many other by diamond merchants, and so on for many other specialties. specialties.

The common feature of all such clusterings is that The common feature of all such clusterings is that each unit finds the location good each unit finds the location good because of the because of the presence of the others. presence of the others. There is a positive There is a positive mutual mutual attraction attraction rather than a repulsion. The explanation rather than a repulsion. The explanation of such mutual-attraction clusters lies in special of such mutual-attraction clusters lies in special characteristics of the activity itself, its markets, or characteristics of the activity itself, its markets, or its suppliers. its suppliers.

In some activities, the basic reason for the In some activities, the basic reason for the agglomerative tendency is that the outputs of agglomerative tendency is that the outputs of individual units are not standardized; they individual units are not standardized; they are not perfect substitutes for one another, are not perfect substitutes for one another, and moreover, they differ in such manifold and moreover, they differ in such manifold and changing ways that they cannot be and changing ways that they cannot be satisfactorily compared by the buyer without satisfactorily compared by the buyer without actual inspection. actual inspection.

The locational significance of this The locational significance of this characteristic can best be seen by a pair of characteristic can best be seen by a pair of contrasting examples.contrasting examples.

A manufacturing firm buying sheet steel simply A manufacturing firm buying sheet steel simply decides on its specifications and then finds out decides on its specifications and then finds out which steel producer will give the best price and which steel producer will give the best price and fastest delivery. A visit to warehouses or rolling fastest delivery. A visit to warehouses or rolling mills to look over the sheets and make a selection mills to look over the sheets and make a selection is unnecessary, because the specifications is unnecessary, because the specifications themselves (plus conceivably a sample sent for themselves (plus conceivably a sample sent for testing in the buyer’s plant or laboratory) fully testing in the buyer’s plant or laboratory) fully identify the characteristics of the steel. identify the characteristics of the steel. Consequently, the transfer costs involved are those Consequently, the transfer costs involved are those of shipping the steel from producer to user, and of shipping the steel from producer to user, and there is nothing in the situation that would make it there is nothing in the situation that would make it desirable or convenient for the rival sheet steel desirable or convenient for the rival sheet steel producers to be concentrated in one place.producers to be concentrated in one place.

Contrast this with a man or woman buying a car Contrast this with a man or woman buying a car or a new hat, a department store selecting its or a new hat, a department store selecting its line of fall fashions, or a fashion designer line of fall fashions, or a fashion designer searching for something simply devastating in searching for something simply devastating in novelty buttons. novelty buttons.

The items cannot be adequately described in a The items cannot be adequately described in a catalog, and it would be much too expensive and catalog, and it would be much too expensive and time consuming for the producers to supply each time consuming for the producers to supply each prospective buyer with a full set of samples. prospective buyer with a full set of samples.

Under these circumstances, the "demand" is not Under these circumstances, the "demand" is not so much demand for specific items as it is so much demand for specific items as it is demand for a demand for a varied display of products; varied display of products; and the and the wider the variety presented at a particular wider the variety presented at a particular location, the more demand that location will location, the more demand that location will attract.attract.

These examples illustrate one These examples illustrate one important kind of important kind of external economy external economy of agglomeration of agglomeration of an activityof an activity—"external" to the individual unit —"external" to the individual unit involved because the advantages involved because the advantages depend on how many other units of depend on how many other units of its type are joining it to make a its type are joining it to make a cluster that attracts demand cluster that attracts demand

The externalities associated with the The externalities associated with the size of a cluster are by no means size of a cluster are by no means limited to those that enhance limited to those that enhance demand demand as a result of the characteristics of as a result of the characteristics of shopping behavior. Some closely shopping behavior. Some closely analogous external economies of analogous external economies of agglomeration involve cost and agglomeration involve cost and supply considerations, and these tend supply considerations, and these tend to affect many of the same activities. to affect many of the same activities.

If products are complexly differentiated and If products are complexly differentiated and changeable from one day or week to the next, changeable from one day or week to the next, the chances are that at least some of the the chances are that at least some of the inputs also share those characteristics. inputs also share those characteristics.

Thus a fashion garment shop will have a Thus a fashion garment shop will have a constantly changing need for different fabrics, constantly changing need for different fabrics, thread, buttons, zippers, and the like.thread, buttons, zippers, and the like.

With the nature of the output continually With the nature of the output continually changing, manpower needs can vary changing, manpower needs can vary unpredictably and suddenly; with speedy unpredictably and suddenly; with speedy delivery at a premium and production delivery at a premium and production scheduling intricate, equipment repairs and scheduling intricate, equipment repairs and parts must be quickly available. parts must be quickly available.

Every one of these input requirements, plus Every one of these input requirements, plus others, is best satisfied in a tight cluster. The others, is best satisfied in a tight cluster. The basic reason can be made clear by the basic reason can be made clear by the following example.following example.

Suppose we have a small plant that Suppose we have a small plant that manufactures ladies’ coats. A long sequence of manufactures ladies’ coats. A long sequence of separate operations is involved, including such separate operations is involved, including such operations as cutting and binding the operations as cutting and binding the buttonholes. buttonholes.

Specialized equipment exists for making Specialized equipment exists for making buttonholes rapidly and cheaply in large buttonholes rapidly and cheaply in large quantities, but it represents a sizable quantities, but it represents a sizable investment. investment.

Individual coat manufacturers would not find it Individual coat manufacturers would not find it worthwhile to invest in such a machine, since they worthwhile to invest in such a machine, since they could not keep it busy all the time; they have to could not keep it busy all the time; they have to resort to making their buttonholes in a slower resort to making their buttonholes in a slower way, involving greater labor cost.way, involving greater labor cost.

However, if they locate in a cluster with enough However, if they locate in a cluster with enough other clothing manufacturers, their combined other clothing manufacturers, their combined need for buttonholes may suffice to keep at least need for buttonholes may suffice to keep at least one of the specialized buttonhole machines one of the specialized buttonhole machines reasonably busy. Then a separate firm specializing reasonably busy. Then a separate firm specializing in buttonhole making joins the cluster. The in buttonhole making joins the cluster. The clothing manufacturers contract that operation clothing manufacturers contract that operation out to that firm, to the advantage of all concerned, out to that firm, to the advantage of all concerned, including the customer who gets the coat cheaper.including the customer who gets the coat cheaper.

First, we have explained an First, we have explained an external external economy for the clothing manufacturers economy for the clothing manufacturers in terms of the in terms of the internal internal economies economies entailed in specialized operationsentailed in specialized operations..

TThe buttonhole-making establishment he buttonhole-making establishment and other such auxiliary suppliers must and other such auxiliary suppliers must have at least a certain minimum amount have at least a certain minimum amount of business or they cannot cover their of business or they cannot cover their fixed costsfixed costs..

Second, the result of the mutually Second, the result of the mutually beneficial symbiosis of the garment beneficial symbiosis of the garment makers and the buttonhole maker is that makers and the buttonhole maker is that the former are now also more the former are now also more specialized. They are confining specialized. They are confining themselves to a narrower range of themselves to a narrower range of operations, and for any given level of operations, and for any given level of output of coats they will have smaller output of coats they will have smaller plants and fewer employees; that is, the plants and fewer employees; that is, the productivity productivity of inputs will be enhanced. of inputs will be enhanced.

If, as the result of specialization, the If, as the result of specialization, the location unit within an activity cluster can location unit within an activity cluster can take advantage of internal economies of take advantage of internal economies of scale, subsequent increases in productivity scale, subsequent increases in productivity will move the unit down along its average will move the unit down along its average total cost curve. total cost curve.

Thus in panel (a) of Figure 5-1, location Thus in panel (a) of Figure 5-1, location within the cluster has made it possible to within the cluster has made it possible to increase the rate of output from increase the rate of output from Q0Q0, to , to Q1Q1, , with a consequent decrease in average total with a consequent decrease in average total costs from costs from ATC() ATC() to to ATC1.ATC1.

The increased efficiency in production that results The increased efficiency in production that results from the cluster of activity may show up also as a from the cluster of activity may show up also as a decrease in average total costs at decrease in average total costs at each rate of each rate of output. output.

As shown in panel (b) of Figure 5-1, this would As shown in panel (b) of Figure 5-1, this would imply a downward shift in costs from imply a downward shift in costs from ATC ATC to to ATC’. ATC’.

Reasons:Reasons: TThe products and services they produce will be available he products and services they produce will be available

to all buyers at lower cost. to all buyers at lower cost. SSavings in transfer costs realized by members of the avings in transfer costs realized by members of the

clustercluster.. TThe ability of group members to maintain smaller he ability of group members to maintain smaller

inventories in the face of demand or supply uncertaintiesinventories in the face of demand or supply uncertainties IIncreases in labor productivity resulting from ncreases in labor productivity resulting from

specialization in the work placespecialization in the work place IIncreased efficiency in management and organization.ncreased efficiency in management and organization.

(1) economies associated with size of (1) economies associated with size of the individual the individual location unit location unit (plant, store, (plant, store, or the like); (2) economies associated or the like); (2) economies associated with the size of the individual with the size of the individual firm; firm; and and (3) economies associated with the size (3) economies associated with the size of the agglomeration of that activity at of the agglomeration of that activity at a a location. location.

We can refer to these, for brevity’s We can refer to these, for brevity’s sake, as sake, as unit, firm, unit, firm, and and clustercluster economieseconomies

essential part of a cluster that is essential part of a cluster that is advantageous to garment advantageous to garment manufacturers is a variety of such manufacturers is a variety of such related activities as machine rental related activities as machine rental and repair; designing; provision of and repair; designing; provision of special components such as special components such as buttonholes, fasteners, and buttonholes, fasteners, and ornaments; trucking services; and so ornaments; trucking services; and so on. on.

Understanding Key Understanding Key Industries: Required DataIndustries: Required Data

Total employment for your area (current Total employment for your area (current year and an earlier year) year and an earlier year)

Employment by industry for your area Employment by industry for your area (current year and an earlier year) (current year and an earlier year)

Total national employment (current year Total national employment (current year and an earlier year) and an earlier year)

National employment by industry National employment by industry (current year and an earlier year) (current year and an earlier year)

Payroll by industry for your area Payroll by industry for your area Earnings by industry for your area Earnings by industry for your area Number of firms by industry for your area Number of firms by industry for your area

Step 1: Share of local employmentStep 1: Share of local employment For each of your industries For each of your industries determine its share of all local determine its share of all local employment and its share of local employment and its share of local employment in its sector. employment in its sector.

Step 2: Change in employmentStep 2: Change in employment Although an industry may not Although an industry may not currently register one of the highest currently register one of the highest shares of employment, it may be shares of employment, it may be outstripping all other firms in terms outstripping all other firms in terms of growth in employment. In this of growth in employment. In this case, you would want to study the case, you would want to study the industry and try to understand what industry and try to understand what is driving its growth. is driving its growth.

Step 3: Location quotientsStep 3: Location quotients The location quotient is a measure of The location quotient is a measure of an industry's concentration in an an industry's concentration in an area relative to the rest of the area relative to the rest of the nation. It compares an industry's nation. It compares an industry's share of local employment with its share of local employment with its share of national employment. share of national employment.

Industry Location Quotient =Industry Location Quotient =(Employment in Industry/Total (Employment in Industry/Total Employment in Base)/Employment in Base)/(National Employment in (National Employment in Industry/Total National Industry/Total National Employment) Employment)

A location quotient greater than one A location quotient greater than one implies that the industry is producing implies that the industry is producing more goods and services than are more goods and services than are consumed locally. Thus, the industry consumed locally. Thus, the industry is exporting the goods or services out is exporting the goods or services out of the area and, in the process, of the area and, in the process, bringing new dollars into the area. bringing new dollars into the area. Industries that bring dollars into the Industries that bring dollars into the area help the local economy grow. area help the local economy grow.

Step 4: Change in location quotients Step 4: Change in location quotients Another way to use location Another way to use location quotients is to look at how they have quotients is to look at how they have changed over a period of time. This changed over a period of time. This comparison will give you an idea of comparison will give you an idea of whether each industry is increasing whether each industry is increasing or decreasing its concentration and or decreasing its concentration and importance in your area relative to importance in your area relative to other areas.other areas.

Industry clusters in Industry clusters in TurkeyTurkey

Engineering Engineering Production and Processing of Field CropsProduction and Processing of Field Crops Stone-Based IndustryStone-Based Industry Packaged Food Products and BeveragesPackaged Food Products and Beverages TextileTextile Media and ServicesMedia and Services Natural Resource Based IndustriesNatural Resource Based Industries Oil Based IndustriesOil Based Industries ChemicalsChemicals LeatherLeather

Chemicals Engineering Leather

Media and Services

Natural Resource Based

Packaged Food Products

Production and Processing of Field Crops

Stone Based Textile

İstanbul (İstanbul) 2,11 1,01 1,82 1,61 0,60 0,39 0,11 0,82 1,16

Ankara (Ankara) 0,72 1,36 0,87 3,00 0,86 1,26 0,83 1,64 0,32

İzmir (İzmir) 0,14 1,09 1,35 0,99 0,47 1,97 2,75 0,97 0,71

Bursa (Bursa, Eskişehir, Bilecik) 0,01 0,88 0,20 0,37 0,70 1,41 0,14 1,07 1,31

Kocaeli (Kocaeli, Yalova, Bolu, Sakarya, Düzce) 1,87 1,52 0,00 0,19 2,50 0,94 0,22 1,86 0,30

Tekirdağ (Tekirdağ, Kırklareli, Edirne) 0,00 0,42 0,00 0,29 0,16 0,71 1,62 0,62 1,76

Adana (adana-mersin) 0,00 0,51 0,00 0,66 0,94 0,86 1,59 1,20 1,27

Aydın (Aydın-Denizli-Muğla) 0,61 0,26 0,00 0,41 0,17 0,36 0,10 0,29 2,19

Antalya (Antalya-Isparta - Burdur) 2,28 0,60 0,00 0,00 0,00 2,98 4,81 1,87 0,17

Chemicals Engineering Leather

Media and Services

Natural Resource Based

Packaged Food Products

Production and Processing of Field Crops

Stone Based Textile

Balıkesir (Balıkesir-Çanakkale) 0,00 0,02 1,94 1,48 0,00 8,79 2,70 0,87 0,14

Zonguldak (Zonguldak-Karabük-Bartın) 0,00 4,44 0,00 1,57 0,28 0,48 0,00 0,30 0,00

Manisa (Manisa, Uşak, Kütahya, Afyon) 0,57 0,31 2,49 0,44 0,16 2,69 2,21 2,16 0,56

Konya (Konya- Karaman) 0,00 2,56 0,00 0,98 0,56 1,55 1,97 1,14 0,14

Gaziantep (Gaziantep-Kilis-Adıyaman) 0,00 0,02 0,43 0,00 0,13 0,88 0,32 0,44 2,22

Hatay (Hatay-Osmaniye-Kahramanmaraş) 0,00 4,57 0,00 0,00 0,00 0,09 2,31 0,14 0,00

Kayseri (Kayseri-Sivas-Yozgat) 0,00 1,29 0,00 0,00 3,18 0,58 0,49 1,04 0,88

Kırıkkale(Kırıkkale-Nevşehir-Kırşehir-Niğde-Aksaray) 1,66 1,63 0,00 0,00 2,61 0,95 3,04 1,60 0,00

Samsun (Samsun-Amasya-Çorum -Tokat) 0,00 0,68 1,14 0,00 0,73 0,11 12,10 1,01 0,05

Chemicals Engineering Leather

Media and Services

Natural Resource Based

Packaged Food Products

Production and Processing of Field Crops

Stone Based Textile

Trabzon(Trabzon-Rize-Artvin-Giresun-Ordu-Gümüşhane) 0,28 0,05 0,00 0,60 13,92 0,24 0,81 0,38 0,00

Malatya (Malatya- Elazığ-Tunceli-Bingöl) 0,00 2,16 0,00 0,00 0,07 1,75 9,44 0,00 0,00

Kastamonu (Kastamonu-Sinop-Çankırı) 0,00 0,00 0,00 5,25 0,00 0,00 5,85 2,70 0,00

Erzurum ( Erzurum-Erzincan- Bayburt) 0,00 0,40 9,22 0,00 0,00 2,25 12,89 0,00 0,00

Şanlıurfa (Diyarbakır-Şanlıurfa) 0,00 0,64 0,00 0,00 0,00 5,91 0,80 1,41 0,59

Mardin (Batman-Mardin-Siirt-Şırnak) 0,00 0,00 0,00 0,00 10,60 1,39 1,27 1,26 0,00

Ağrı (Kars-Iğdır-Ağrı-Ardahan) 0,00 0,00 14,97 0,00 0,00 0,00 15,66 0,00 0,00

Van (Van-Hakkari-Bitlis-Muş) 0,00 0,00 9,28 0,00 0,00 1,68 12,66 0,00 0,32

İstanbul district: Textile and engineeringİstanbul district: Textile and engineering Bursa, Eskişehir, Bilecik: Textile and engineering. Bursa, Eskişehir, Bilecik: Textile and engineering.

Furniture.Furniture. Kocaeli, Sakarya, Düzce, Bolu, Yalova: Textile and Kocaeli, Sakarya, Düzce, Bolu, Yalova: Textile and

engineeringengineering İzmir: Textile and stone based industries, field İzmir: Textile and stone based industries, field

cropscrops Tekirdağ, Edirne, Kırklareli: Textile and leatherTekirdağ, Edirne, Kırklareli: Textile and leather Ankara district: Engineering, furnitureAnkara district: Engineering, furniture Kayseri: FurnitureKayseri: Furniture Gaziantep: TextileGaziantep: Textile Çorum, Denizli, Yozgat, Çankırı, Niğde, Nevşehir, Çorum, Denizli, Yozgat, Çankırı, Niğde, Nevşehir,

Kırşehir are considered as developing industry Kırşehir are considered as developing industry districts.districts.

The Fashion and Textile Cluster The Fashion and Textile Cluster (FTC) project is financed by the (FTC) project is financed by the European Union and the beneficiary European Union and the beneficiary is the Turkish Small and Medium is the Turkish Small and Medium sized Enterprises (SMEs) in the sized Enterprises (SMEs) in the Textile and Clothing sector (T/C), Textile and Clothing sector (T/C), represented in this instance by represented in this instance by ITKIB(Istanbul Textile and Apparel ITKIB(Istanbul Textile and Apparel Exporters’ Union). Exporters’ Union).

The overall objective for the FTC project The overall objective for the FTC project is to increase the international is to increase the international competitiveness of SMEs in the T/C competitiveness of SMEs in the T/C sectors in Turkey. In addition there is a sectors in Turkey. In addition there is a need to increase the level of networking need to increase the level of networking among SMEs in the T/C sector at local, among SMEs in the T/C sector at local, national and European levels as well as national and European levels as well as with business support organisations and with business support organisations and related structures.related structures.

To strengthen public and private support To strengthen public and private support structures for SMEs in the T/C sector, and structures for SMEs in the T/C sector, and enable the capacity of Turkish Textile and enable the capacity of Turkish Textile and Clothing sector to be improved with the Clothing sector to be improved with the establishment of a Cluster Coordination establishment of a Cluster Coordination Agency the following supporting Agency the following supporting institutions will be established :institutions will be established : Fashion Institute. Fashion Institute. Research and Development Centre Research and Development Centre Consultancy Centre Consultancy Centre

Figure 6.2  Diamond framework of competitive advantageSource: Adapted from Porter (1990), figure 3.1, p. 72.