Agglomeration and industrial organization: choices involving organizational and spatial shells

Across regions, there are convergence forces (arbitrage) that work against agglomeration forces. The strengths of these opposing forces are hard to sort out. A recent paper ("Clusters, Convergence, and Economic Performance" by Mercedes Delgado, Michael E. Porter, Scott Stern) that made an attempt concludes this way:

These findings suggest a number of policy implications, many of which diverge from the received wisdom among some practitioners. First, effective regional policy should harness complementarities across related economic activity rather than prioritize high-wage or high-tech clusters where there is little pre-existing strength within the region. Hence policy makers should pursue policies that leverage a region‟s cluster strength … Our evidence thus reinforces the view that policy action should focus on building upon pre-existing comparative advantage.

Second, regional economic performance depends crucially on the composition of economic activity rather than the vagaries of political boundaries. The spillovers arising from related economic activity typically span multiple jurisdictions (and even states). Policies aimed at shifting the location of activity within narrow areas will be much less effective than those which operate to harness complementarities across jurisdictions.

What do we know? Ever since Coase, we have known that managers face tough choices in terms of what to do inside vs. outside the firm. There are actually many “organizational shells.” But there are also industrial clusters that agglomerate in cities -- sometimes to include the suburbs, exurbs and even over extended rural areas. There are many “spatial shells.”

Choices are being made with respect to two sets of shells; the many supply chains that form to serve us involve choices over both sets of shells, the organizational and the spatial.