Agglomeration Economies and the Future of Cities William C. Strange

William C. Strange, "Agglomeration and the Future of Cities," Policy Analysis and Economic Policy Conference, 2003. http://www.rotman.utoronto.ca/~wstrange/WS_Future_of_Cities_Wrkg_5-22-03.pdf


p.3

It is important to recognize that concentration is costly. Putting more business activity in
a small area raises the cost of doing business there in many ways: commutes are longer
and space is more costly to name just two. Thus, industry clustering must benefit
businesses in some way that compensates them for the costs of concentrating.

p.4
Cities are costly, as noted above. And there have been technological changes – relatively
cheap air travel and telephone communication, the invention of the fax machine, and
most notoriously the Internet – that have possibly made it less costly to locate away from
concentrations. Thus, there has been speculation that cities will decline in importance.
This is the biggest question of all.

P5
One answer to this question is that agglomeration exists because firms enjoy internal
economies of scale. Scale economies imply that the firm needs many workers; workers
concentrate to economize on commuting; thus, there is an agglomeration. This answer is
not completely satisfying, though, since it motivates only the existence of factory towns
and not the diverse cities that we actually observe.
A more satisfying answer is to say that there are "agglomeration economies", external
economies of scale that make firms more productive in large cities.

p.13
Our results suggest strongly
that firms must be quite close in order to benefit from each other's presence. And this is
true even in the software industry, where presumably everyone has access to email, and
so distance should not matter at all.
I would like to point out that our estimates also establish that diverse locations (low
values of "herf") are more attractive to new firms than are specialized ones. This is
consistent with the increasingly popular view that the benefits of clustering have limits.

It appears that small firms and nonsubsidiary firms have a greater positive
effect on their neighbors than do large firms and subsidiaries.
One interpretation of these results is that an entrepreneurial business environment is more
productive than a hierarchical environment. This certainly appears to be the case in the
Silicon Valley. In the mid-1980s, both the Route 128 corridor in Boston and the Silicon
Valley appeared to be comparable as centers of high-technology. In the intervening
years, the Silicon Valley has prospered, while Route 128 has not. Why? There are many
explanations. Saxenian (1994) has proposed that the difference in business culture is
key. Route 128 is hierarchical, dominated by large corporations. The Silicon Valley is
entrepreneurial, continually refreshed by startups.

p.15
cities
continue to have higher productivity than the national economies that contain them.