Lecture 5

Lecture 5
Why do we have cities?

Overview
 PART I: SOME THEORY

 Quick review
 How to organize productive activities?
 Technological change and strong competition
 Product innovations
 Codified versus tacit knowledge
 Globalization / Localization
 Cities, new industrial spaces, clusters, learning regions, regional innovation systems…
 Traded and untraded interdendencies
 What do cities do?
 Matching, sharing, learning
 PART II: EXAMPLES (please check slides)
 PART III: Clusters (see reading)
 PART IV: Debate
 Conclusion
PAGE 2 SAMPLE FOOTER

Learning outcomes
 Understand why, despite globalization, we see increasing spatial concentration of

particular kinds of industry
 Understand the difference between codified and uncodifable/tacit knowledge and its
relevance for the localization of economic activity
 Understand how waves of technological change (but also changes in regulation,

institutions, social-environmental context, etc.) can eliminate existing, local
competitive advantages and produce windows of locational opportunity for new
industrial spaces
 Understand the generic and specific conditions for regional/urban competitive

advantage (urbanization/localization economies)
 Use Porter‘s cluster concept to understand the importance of spatial proximity in

production (FROM PAPER)

Globalization….declining core?
 Over the last few weeks we focused on the centrifugal forces of

capitalism
 Increaseing competition in low wage sector industries and low-skilled

tasks with countries of the Global South (example China) and integration in
global value chains
South, no?
 Loosers in the North are insufficiently compensated for their losses through
cheaper consumer goods (Stolper-Samuelson)
 But: we also know that the effects of globalization are not the same in all
countries – institutional variation / modes of regulation / state form
 And, there are also winning regions of globalization in the Global North -
> The rest of the course we will focus on those winners: Industrial
Districts, Creative Cities, Global Cities

Possible ways of organizing production
Despite the second unbundling we
observe a resurgence of regional
economies
Industrial district (Silicon Valley)
concentrated
River Rouge Plant
NIKE
Countries
dispersed
Volkswagen production network
single firm many firms

How can firms organize production?
 Firms need to select the precise combination of labor, capital and

technology that will be used (and ideally, maximize their profits)
 Second unbundling allowed for global GVC production ->global

outsourcing
 But often complemented by strong concentration of economic activity in

so-called industrial districts, clusters, regional innovation systems or
learning regions –> in particular in those industries and parts of the
value chain where face-to-face contact is relevant
 -> in knowledge-intensive, innovative sectors….

So why and how do new industrial spaces
emerge….?
 Assuming that there are advantages to co-location because of external
economies of scale (see below), how is it that relatively
„underdeveloped“ places can become new centers of innovation and
production?
 The „why“ is related to the logic of capitalism and the imperative for
technological change
 The „how“ and „why in particular places“ has a lot to do with luck, being
at the right place at the right time, making some good decisions at the
right time, etc… but they are context specific and difficult to explain in
general.

Technological change and strong
competition (Storper and Walker 1989)
 LP
M  C .... P....C '  M  m  etc.
MP
Goal is to make a profit in order to keep the wealth creation process going
Question: How does technology fit in here? Can we identify different types of
technology that may be important here?
SEITE 8 FUSSZEILE
Technological change and windows of
locational opportunity
 In capitalism
technological change has
to occur
 Strong competition refers
to competition in the
realm of
technology/production
not the market (through
oligopoly/monopoly –
weak competition)
 Each new technological
regime requires new sets
of skills, occupations,
firms, innovations,
institutions -> opens up
window of locational
opportunity
https://www.futurezone.de/b2b/article215820859/Jeff-
Bezos-ist-sich-sicher-Amazon-ist-am-Ende.html
COPYRIGHT © 2013 BY JOHN WILEY & SONS, INC. ALL
RIGHTS RESERVED.
Shifting economic centers….
Around 1960s….
IT, biotech,…
Steel, consumer products,…
Contemporary product innovation
 Product life cycles are becoming shorter

 Rates of innovation are increasing
 This speeding up has been facilitated by a wide range of
new forms of software and fluid organizational structures

RIGHTS RESERVED.
Key input: Knowledge
 Tacit knowledge типу ти ідеально слідуєш рецепту, а виходить не так, як в ресторані

 Knowhow that can only be effectively shared through people actually doing things
together in real life
 Eg. Knowing how to cook
 Geographically sticky
 Codified knowledge
 Know-how that can be made tangigble by writing it down or creating a diagram
 Eg. instructions in a cook book
 Travels across space
 Tacit knowledge is the key incredient in design- and knowledge-intensive

industries so that the production of those technologies are concentrated in
relatively small number of regions (as long as face-to-face costs remain high)

Globalization and Localization
 Despite falling spatial transaction costs the importance of agglomeration

economies have increased globally
 More than half of the world population now lives in cities
 Why is that?
 Spatial transaction costs for routine, standardized non-knowledge intensive

activities have fallen
 Spatial transaction costs for non-routine, non-standardized and knowledge

intensive activities have risen
 Co-location to carry out those non-routine, non-standardized and

knowledge intensive activities lowers those costs

Changes in industrial organization…

Cities, industrial districts, clusters
 Concentrations of firms in space
 Large diversity of sectors or related sectors
 Interaction among local firms (traded and untraded interdependencies)
 Embedded in particular local social networks and business culture

Binding clusters together: traded and
untraded interdependencies
 Traded interdependencies can be accrued through firms co-locating in a
cluster alongside suppliers, partners, and customers with which they
have formal trading relationships.
 Untraded interdependencies: informal connections that tie firms together,

and are constituted by intangible sets of skills, attitudes, habits, and
conventions that become associated with particular forms of specialized
production.

RIGHTS RESERVED.
What do these agglomerations do?
 Cities (and localized regional production systems and/or clusters) are

places where benefits from matching, sharing and learning are
maximized
 Matching: Jobs and Workers with particular skills to fill the jobs that
require those skills Supplier and Industry
Products and Consumers
 Sharing: Of suppliers and customers -> more detailed division of labor
 Learning: Knowledge spillovers

Leading to externalities ….
Fordism Explained why firms

and people are
clustered together
NOT explained why in

this particular place
Post-fordism

Industries benefitting from clustering now
Propulsive sector Typical features Examples
Finance and advanced Global firms employing London, New York
business services highly skilled and paid
„knowledge“ workers
managing aspects of
global business
Design/craft industries
Cities
 (a) Labor(Business
intensive (eg. andExploitation
Consumer of Services)
New York, Los Angeles,
Clothing, furniture) „sweatshop“ labor; often Paris
high level of immigrants;
 Industrial Districts (Manufacturing)
subcontracting
(b) Design-intensive (eg. High-quality products. Jura, Emilia-Romagna,
 Hi-Tech Regions
Jewellery, watches,
(Silicon Valley, Cambridge,
Extreme social division of
etc.)
Third Italy, Jutland
 Artisanal Systemslabor
ceramics,..) of Production
(but class (“Third Italy”, Soho)
polarization subdued in
some examples)
High-tech industries
Segmented local labor Silicon Valley, Route 128,
markets with skilled M4 corridor UK, Grenoble,
managerial cadres and Montpellier, Sophia
malleable (non-union, Antipolis
temporary) workers
To recap: Why the resurgence
відродження
of regional
economies? В чому прикол міст?
 Speeding up of innovation cycles -> need to react more quickly to

changes -> investment in large single-purpose machinery and skill sets
may not be recuperated –> use networks of suppliers/customers instead
окупатися
партіями, серіями
 Higher demand for diverse products -> batch production, not mass
production
 Flexibility: lower inventory, lower overhead costs, quicker reaction to

market volatility by redeployment of workers and suppliers on short
notice; short lead times; fast delivery; quick market entry and exit.

Examples: Third Italy Example:
Japanese system
of flexible
production
Third Italy
Source: Adapted from Amin (2000), Figure 10.1. Toyota City
Source: Adapted from Kaneko, J. and Nojiri, W. (2008) The logistics of Just-in-Time between parts
suppliers and car assemblers in Japan, Journal of Transport Geography, 16: 155–173, Figure 6.

RIGHTS RESERVED.
Examples of industrial districts…
 Different types
 Often lead firms surrounded by a large number of small, specizalized
firms (Toyota und suppliers, Fairchild Semiconductors, Google and lots of
small IT engineering startups, Holywood Studies (MGM, Sony,..) plus
large number of small specialized companies…)
 In others, such as those craft-based industries in the „Third Italy“ large
companies are absent
region in Italy known for its clusters of design-related craft industries

and traditional manufacturing sectors like wool textiles.
northeastern and central parts of Italy
highlighting the importance of industrial districts and regional
economies in shaping the country's economic landscape

Figure 12.5. Motorsport Valley in the
United Kingdom, late 1990s.
Source: Adapted from Pinch, S. and Henry, N. (1999)

Paul Krugman’s geographical economics,
industrial clustering and the British motor sport
industry, Regional Studies, 33: 815–827, Figure 1.
Source: Adapted from Scott (2002), Figure 4.
Figure 12.3. The Hollywood film production cluster.

RIGHTS RESERVED.
What do you need for making movies?
Plus:
Lawyers
Venture capital
Accountants
Actors
Designers
IT specialists…

Explanations for clustering of
economic activity in Silicon Valley
PROBLEM: They explain why firms and people

cluster in space, but they do not explain why
specific cities/locations emerge in the first place.
Source: Saxenian 1994
High technology employment
Source: Saxenian 1994

Why did Silicon Valley get ahead?
 Change in technological paradigm (Transistor)
 Network-based industrial system (not hierarchical)
 Contingent factors:
 Defense expenditures
 Important personalities (Hewlett-Packard 1937, Shockley 1955)
 Stanford University (Terman)
 Role of Bay Area University and research institutes (3Com, Cisco,
Yahoo, Seagate, Google, Sun Microsystems)
 different business culture
 Spin-offs (Fairchild semiconductors -> Fairchildren)
 Untraded interdependencies/Knowledge spillovers
 Venture Capital
Fairchild Semiconductors

Patents Silicon Valley
http://cityobservatory.org/what-
patents-tell-us-about-americas-most-
innovative-cities/

Clusters
 Clusters are spatial concentrations of firms in the same or related

industrial sectors and supporting institutional environments
 Cluster concept builds on idea that externalities are important and that
the co-location of related industries should be fostered
 It is related to growth pole and/or growth centers idea and actively seeks
to create those
 One central aspect of successful clusters is the role of knowledge creation
and exchange
 Michael Porter developed this idea in the late 1980s and basically
attempted to specify certain characteristics of industrial districts that
could then be empirically identified and investigated.
SEITE 33 FUSSZEILE
The industrial cluster: Dimensions
ЯК САМЕ фірма оперує
ДЛЯ КОГО, для якого ринку

виговляється продукція
в якийх УМОВАХ
З КИМ співпрацює
Source: Porter 1990

Localized capabilities
 Economies of scale and scope related to Input-output

relationships usually not sufficient for understanding spatial
clustering
WHAT IS IMPORTANT FOR CLUSTERS?
 Socioinstitutional settings, interfirm communication and
interactive processes of localized learning important to generate
growth, knowledge spillovers,…
 Additional importance: industrial atmosphere
 Shared knowledge basis enables cluster firms to exchange

information, re-assemble information and knowledge to create
new new knowledge and information
Industrial atmosphere: Buzz
 Network and communication linkages between firms

develop within a cluster (suppliers, customers)
 Simply being there means that firms are able to absorb
knowledge,…can be through formal meetings or
accidental run-ins,…(chatting, gossiping, brainstorming,
in-depth discussions, problem analysis)
 Needs to be embedded in shared interpretive schemes,
cultural traditions and conventions
 Communities of practice
 Participation of trust does not require extra investment
Example: The Californian wine cluster
Wine-making equipment
Grape stock
State government agencies Barrels
Fertilizer, pesticides,
herbicides Bottles
Growers and Wineries and
vineyards Processing Caps and corks
Grape harvesting
facilitites
equipment
Labels
Educational, research, and
Irrigation technology Trade organizations Public relations and advertising
Specialized publications
California agricultural cluster Tourism cluster
Food and restaurant cluster

Source: Porter, 1998
Western
Clusters in the US Massachusetts
Polymers
Seattle Detroit Boston
Aircraft equipment and design
Wisconsin/ Auto
Oregon Iowa/ Illinois Mutual funds
Boat and shipbuilding Equipment Biotechnology
Electrical measuring equipment And parts
Metal fabrication Agricultural Software and
Woodworking equipment
equipment Western Networking
Logging and lumber supplies
Michigan Venture Capital
Office and Rochester
Boise Minneapolis Imaging Providence
Cardiovascular Institutional equipment Jewelry
Sawmills furniture
Equipment and Michigan Marine equipment
Farm machinery
services Clocks Hartford
Omaha Insurance
Telemarketing
Hotel reservations New York City
Silicon Valley Las Vegas Financial services
Credit car processing Cleveland/
Microelectronics Amusements and Warsaw Advertising
Biotechnology Casinos, small Orthopedic Louisville Publishing
airlines services Paints and coatings Multimedia
Venture Capital
Wichita Nashville/ Pennsylvania/ NJ
Light aircraft Pharmaceuticals
Los Angeles Farm equipment Louisville
Hospital North Carolina
Defense and Dalton Household furniture
management Carpets
aerospace Synthetic fibres
Entertainment Phoenix Dallas hosiery
Helicopters
Real estate
Semiconductors
development
Pittsburgh
Carlsbad Electronic Baton Rouge/ Advanced materials
Golf equipment Southwestern New Orleans Energy
Testing labs
Optica Texas/Louisiana Speciality foods
Chemicals
Colorado Southern Florida
Computer-integrated Health technology
Systems and programming computers
Engineering services
Mining and oil and gas
Source: Porter 1998
exploration
The need for pipelines
КЛАСТЕРАМ ПОТРІБНІ ЗВЯЗКИ ІЗ ЗОВНІШНІМ СВІТОМ
застарілі відірвані від
 Localized knowledge can be come “stale”, insulated from extra-
regional knowledge creation and innovation (big fish in small pond
kind of thing)
 Also need to find out about other markets to avoid negative lock-in
 Strategic partnerships (eg. in biotech), intra-firm linkages often
supplement “cluster knowledge” ???
що більше фірм  The more cluster firms engage in building extra-local knowledge
мають партнерства pipelines the more dynamic the buzz from which local actors benefit
ззовні, то більше
додаткових знать  Generation of complementary knowledge – “pumping in” knowledge
потрапляє всередину from somewhere else складно вибудувати оці
зовнішні звязки, бо для цього
 Often difficult to build because a common set of conventions, ж треба face-to-face
understanding etc. needs to be developed (costly and time- interaction, e.g.літати на
intensive) конференції, ділові зустрічі
 Firms must be able to assimilate information pumped in from the тощо. це довго, дорого
outside (absorptive capacity)
Buzz-and-pipeline model
Source: Bathelt et al. 2004

Cluster policies
 Active policy intervention
 Generate clusters from scratch (greenfield clusters)

 Provide help to improve already existing concentrations of industries
 Point is to tap into endogeous development potential and strengthen it

through policy intervention
 But sometimes also based on attracting exogenous inputs (Attracting of

large companies; participation in external research networks,…)
 Variety of policy interventions leads to typology of clusters
SEITE 42 FUSSZEILE
Typology of clusters
Cluster Type Characteristics

„working cluster“ Concentration of critical mass
of firms and specialized labor,
knowledge to benefit from
agglomeration economies
Latent clusters Critical mass of firms, but
deficits in interaction and
knowledge exchange
Potential clusters Some elements available but
insufficient to generate
agglomeration economies
Politically motivated clusters Critical mass non-existent, but
pushed by regional policy
„wishful thinking“ clusters No critical mass of anything
SEITE 43 Source: Enright (2003) in Maier et al. 2012
FUSSZEILE
Steps in cluster policy
 Identification of clusters – Cluster mapping (see map above for U.S.)

 Optimisation of institutional framework (eg. Change tax and funding
policies to encourage innovation)
 Collection and dissemination of information – about markets, new
technologies,…
 Support startup activity
 Attraction of regionexternal FDI (eg. Subsidies)
 Stimulation of networking (creation of informal meetings between cluster
particpants, subsidies for networking,…)
 Investment in cluster-specific infrastructure (eg. Creation of research
institutes that benefit firms in local cluster)
 Location marketing
Source: Enright (2003) in Maier et al. 2012

SEITE 44 FUSSZEILE
Problems of cluster strategy
 Problem of negative lock-in (Examples: German Ruhr Area,

Michigan Car Industry, Mining in Northeastern France,
Microcomputers around Boston)
•
 Is it really different from literature on industrial districts?
зовнішні звязки
 Can pipelines help?
 Empirical problem: Only selected regions are chosen / others

ignored
 Policy dilemma:
 Clusters generally function without much economic policy
 The origins are often based on historical accidents, difficult to
reproduce
 Hence, broad investment in education, infrastructure, basic
research might be a better target for regional economic
policy
Conclusion
 Waves of technological change devalue existing knowledge bases and create windows of locational opportunities
for new industrial spaces
обовязковий
 During early stages of new technological regimes experimentation, face-to-face contact … is imperative
 Agglomeration economies explain why the concentration of economic activity in cities and industrial districts occurs
in general
 The cluster concept is very widespread among policy makers and attempts to identfiy some of those factors that
generate agglomeration economies empirically.
 But they are insufficient to explain the origin of competitive advantages in industries in particular places
 For this we have to combine general processes/mechanisms with particular local histories (chance, accident,
historical path dependency, strong personalities, development of appropriate institutional environment, etc. are all
imporant and cannot be predicted before history ran its course).
 In practice, local and non-local stakeholders have to get together to design policies that work for the local economy.
References
Bathelt et al. (2004) (see reading list)
Maier, G., Tödtling, F. and Trippl, M. (2012) Regional- und

Stadtökonomik 2. Fourth edition. Springer: Vienna and New York.
Marshall, A. (1920). The principles of economics. London, MacMillan.
Porter, M. (1990). The competitive advantage of nations. New York, Free Press.
Porter, M. (1998). “Clusters and the new economics of competition.” Harvard Business Review(Nov/Dec): 77-
98.
Saxenian, A. (1994). Regional advantage. Cambridge, MA and London, Harvard University Press.
Scott, A. (1988a). Metropolis - From the division of labor to urban form. Los Angeles and Berkeley, University
of California Press.
Scott, A. J. (1988b). New industrial spaces. London, Pion.
Storper, M. (1997). The regional world. New York and London, Guilford.

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Lecture 5 - Cities and Clusters

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Why do we have cities?

 PART I: SOME THEORY

PAGE 2 SAMPLE FOOTER

 Understand why, despite globalization, we see increasing spatial concentration of

 Understand how waves of technological change (but also changes in regulation,

 Understand the generic and specific conditions for regional/urban competitive

 Use Porter‘s cluster concept to understand the importance of spatial proximity in

PAGE 3 SAMPLE FOOTER

 Over the last few weeks we focused on the centrifugal forces of

 Increaseing competition in low wage sector industries and low-skilled

PAGE 4 SAMPLE FOOTER

River Rouge Plant

Volkswagen production network

single firm many firms

 Firms need to select the precise combination of labor, capital and

 Second unbundling allowed for global GVC production ->global

 But often complemented by strong concentration of economic activity in

 -> in knowledge-intensive, innovative sectors….

PAGE 6 SAMPLE FOOTER

PAGE 7 SAMPLE FOOTER

 Product life cycles are becoming shorter

COPYRIGHT © 2013 BY JOHN WILEY & SONS, INC. ALL

 Tacit knowledge типу ти ідеально слідуєш рецепту, а виходить не так, як в ресторані

 Tacit knowledge is the key incredient in design- and knowledge-intensive

PAGE 13 SAMPLE FOOTER

 Despite falling spatial transaction costs the importance of agglomeration

 Spatial transaction costs for routine, standardized non-knowledge intensive

 Spatial transaction costs for non-routine, non-standardized and knowledge

 Co-location to carry out those non-routine, non-standardized and

PAGE 14 SAMPLE FOOTER

PAGE 15 SAMPLE FOOTER

 Concentrations of firms in space

 Large diversity of sectors or related sectors

 Interaction among local firms (traded and untraded interdependencies)

 Embedded in particular local social networks and business culture

PAGE 16 SAMPLE FOOTER

 Untraded interdependencies: informal connections that tie firms together,

COPYRIGHT © 2013 BY JOHN WILEY & SONS, INC. ALL

 Cities (and localized regional production systems and/or clusters) are

 Sharing: Of suppliers and customers -> more detailed division of labor

 Learning: Knowledge spillovers

PAGE 18 SAMPLE FOOTER

Fordism Explained why firms

NOT explained why in

PAGE 19 SAMPLE FOOTER

 Speeding up of innovation cycles -> need to react more quickly to

 Flexibility: lower inventory, lower overhead costs, quicker reaction to

PAGE 21 SAMPLE FOOTER

COPYRIGHT © 2013 BY JOHN WILEY & SONS, INC. ALL

region in Italy known for its clusters of design-related craft industries

PAGE 23 SAMPLE FOOTER

Source: Adapted from Pinch, S. and Henry, N. (1999)

Source: Adapted from Scott (2002), Figure 4.

Figure 12.3. The Hollywood film production cluster.

COPYRIGHT © 2013 BY JOHN WILEY & SONS, INC. ALL

PAGE 25 SAMPLE FOOTER

PROBLEM: They explain why firms and people

Source: Saxenian 1994

 Change in technological paradigm (Transistor)

 Network-based industrial system (not hierarchical)

PAGE 31 SAMPLE FOOTER

PAGE 32 SAMPLE FOOTER