Sunday, December 7, 2008

Explaining entrepreneurship and development

I had posted esarlier here and here about the debate surrounding the utility of growth clusters and mega-regions.

Alfred Marshall had emphasised three different types of transport costs – the costs of moving goods, people, and ideas – that could be reduced by industrial agglomeration. First, he argued that firms would locate near suppliers or customers to save shipping costs. Second, he developed a theory of labour market pooling to explain clustering that takes advantage of scale economies associated with a larger pool of workers and firms. Finally, he began the theory of intellectual spillovers, which has been re-christened as "network effects" in recent times.

Edward Glaeser and William Kerr find support for all the three Marshallian theories in their new research and claim that market effects, such as proximity to input suppliers and labour market pooling, play a big role in explaining spatial differences in entrepreneurship and economic development, while there is less support for factors like entrepreneurial culture and industrial diversity. They find that co-agglomeration arising through shared natural advantages is more important than any single Marshallian factor, but not as important as the cumulative effect of the three Marshallian factors.

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