On Mon, 3 Jan 2005 00:08:25 +0100, [EMAIL PROTECTED] (Alex Martelli) wrote:
>> True. I have a bit of interest in economics, so I've seen e.g. >> this example - why is it that foreign branches of companies >> tend to cluster themselves in one city or country (e.g. >It's not just _foreign_ companies -- regional clustering of all kinds of >business activities is a much more widespread phenomenon. First, even though I disagree with you in places, thanks for this reply - it enhanced my knowledge of the topic in some places. Re the foreign/domestic companies: I have observed this what I call "irrational clustering" esp. re foreign companies here. >Exogenous is fine if you're looking at the decision a single firm, the >N+1 - th to set up shop in (say) a city, faces, given decisions already >taken by other N firms in the same sector. >The firm's production processes have inputs and outputs, coming from >other firms and (generally, with the exception of the last "layer" of >retailers etc) going to other firms. Say that the main potential buyers >for your firm's products are firms X, Y and Z, whose locations all >"happen to be" (that's the "exogenous" part) in the Q quarter of town. >So, all your competitors have their locations in or near Q, too. Where >are you going to set up your location? Rents are higher in Q than >somewhere out in the boondocks -- but being in Q has obvious advantages: >your salespeople will be very well-placed to shuttle between X, Y, Z and >your offices, often with your designers along so they can impress the >buyers or get their specs for competitive bidding, etc, etc. 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. >At some >points, the competition for rents in quarter Q will start driving some >experimenters elsewhere, but they may not necessarily thrive in those >other locations. If, whatever industry you're in, you can strongly >benefit from working closely with customers, then quarter Q will be >where many firms making the same products end up (supply-side >clustering). >Now consider a new company Z set up to compete with X, Y and Z. Where >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. >So, there are easily >appreciated exogenous models to explain demand-side clustering, too. >That's how you end up with a Holliwood, a Silicon Valley, a Milan (for >high-quality fashion and industrial design), even, say, on a lesser >scale, a Valenza Po or an Arezzo for jewelry. Ancient European cities >offer a zillion examples, with streets and quarters named after the >trades or professions that were most clustered there -- of course, there >are many other auxiliary factors related to the fact that people often >_like_ to associate with others of the same trade (according to Adam >Smith, generally to plot some damage to the general public;-), but >supply-side and demand-side, at least for a simpler exogenous model, are >plenty. >Say that it's the 18th century (after the corporations' power to stop >"foreign" competition from nearby towns had basically waned), you're a >hat-maker from Firenze, and for whatever reason you need to move >yourself and your business to Bologna. If all the best hat-makers' >workshops and shops are clustered around Piazza dell'Orologio, where are >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. 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. >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. - 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 - 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 - production nowadays tends to be geographically distributed as well - 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). 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? Boeing: Seattle?! Why Seattle? Doesn't Boeing sell most of its new aircrafts in Washington? AFAIK, in Europe Boeing does much of its production in cooperation with Alena in Italy. From this viewpoint it really doesn't matter much if Boeing is located in Seattle or anywhere else in America really, does it? 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. :-) >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. 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. 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. 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 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. 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. 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. ;o) -- Real world is perfectly indifferent to lies that are the foundation of leftist "thinking". -- http://mail.python.org/mailman/listinfo/python-list
