ECONOMICS

Existence of Spillovers as an Explanation for Firm Location and its Implications for Government Policy

Existence of Spillovers as an Explanation for Firm Location and its Implications for Government Policy

Introduction

Considering the rapidly increasing competition and other major challenges companies face today, organizations have become more geographically concentrated. This concentration is greatly relates to the agglomeration spillovers (Ellison, Glaeser, & Kerr, 2010, p.1195). According to agglomeration theory of Marshall, New economic Geography models of Krugman, and cluster policies of Porter, trinity of agglomeration economics can provide higher returns to the firms, as it incorporates a local collection of skilful workers, dealer relations, and knowledge spillovers (Potter & Watts, 2011, p.417). The ultimate gains can be arising by the benefits of agglomeration which reduces transport cost. Marshall indicated 3 distinctive kinds of transport costs: the expenses associate with transporting supplies, ideas, and human resource, these costs can reduce by industrial agglomeration. Firstly, Marshall emphasized that companies will locate near consumers and supplier to save cost of shipping. Secondly, he explained clustering by developing the theory of workforce pool in market, and lastly, he started the theory of intellectual spillovers by emphasizing that in agglomeration trade secrecies do not remain mysteries anymore, rather they become in the air. An example of this can be taken from Silicon Valley, where companies locate near each other in order to learn and to speed up their innovation rate (Ellison, Glaeser, & Kerr, 2010, p.1195). Thus, the existence of spillovers is very much the reason of firm location today.

Discussion

Agglomeration Spillover and Location Decision of the Firm

Agglomeration leads a firm to several benefits which can't be neglect that is why agglomeration spillover is the major cause of firm location. Whether in cities or geographic clusters, the benefits from concentration can be gained by reducing transport costs. However, natural advantages like natural resources or national policies can also be the reason of firm's location decision, even if there are no gains from locational proximity. Therefore, the likelihood of coagglomeration of industry pairs arises from the common needs for particular natural benefits such as energy prices or coastal access can also be the reasons of firm locations (Ellison et al., 2010, 1200). Thus, all the factors i.e. goods, ideas, and people are the reasons behind firm's location decision.

Proximity to Customer and Suppliers: Goods

Businesses establish near each other in order to lessen the costs associated with acquiring inputs and shipping goods to the downstream consumers. According to Marshall's argument, when inputs are at greater distance from the eventual market, the firms trade-off the space between suppliers and consumers based on the expenses associated with transporting inputs and outputs (Ellison et al., 2010, 1200). Companies established in denser areas are expected to benefit from cheaper and rapid delivery of local services and local transitional goods. For example, when a technician is required by a high tech firm in order to fix machines, the firm is likely to get advantage of rapid service providence and that too at lesser expense if it ...