Regional Economics

Roberta Capello

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317517863
• Edition: 2
• Topic: Business
• Subtopic: Business generale
• Index: Business

The second edition of Regional Economics provides a comprehensive and up-to-date treatment of regional economics. This fully revised edition includes key theoretical developments of the last ten years.

Topics included span from the earliest location theories to the most recent regional growth theories. It is also is also enriched by the recent debate on smart specialization strategies recently developed by the EU for the design of new cohesion policies.

Key elements covered in the new edition include:

• proximity and innovation theories
• the concept of territorial capital
• the debate on the role of agglomeration economies in urban growth

This textbook is for undergraduate students in regional and urban economics as well as spatial planning courses.

Part I
Location theory

Physical-metric space

1
Agglomeration and location

1.1 Agglomeration economies and transportation costs

Space is inextricably bound up with economic activity. This statement is prompted by the rather banal observation that all forms of production require space. But it also derives from the fact that not all geographical areas afford the same opportunities for production and development. The uneven distribution of raw materials, production factors (capital and labour) and demand (final goods markets) requires firms, and productive activities in general, to select their locations just as they select their production factors and technology. And just as the choice of the factors and technology decisively influences the productive capacity of firms and their position on the market, so location crucially determines the productive capacities of firms and, in aggregate terms, of the geographical areas in which they are located. To ignore this dimension – as traditional economic theory does – is to disregard a factor that sheds significant light on the mechanisms underlying firms’ behaviour and economic activities in general, which drive economic development.¹

The notion of space was first introduced into economic analysis by theories on industrial location. The aim of these theories was to explain location choices by considering the two great economic forces that organize activities in space: transportation costs and agglomeration economies. These forces push the location process in opposite directions since they simultaneously induce both the dispersion and the spatial concentration of production.²

It is because of agglomeration economies that spatial concentration comes about. Widely used in regional economics, the term ‘agglomeration economies’ denotes all economic advantages accruing to firms from concentrated location close to other firms: reduced production costs due to large plant size; the presence of advanced and specialized services; the availability of fixed social capital (e.g. infrastructures); the presence of skilled labour and of managerial expertise, and of a broad and specialized intermediate goods market. All of these are resources whose availability, or production, require a high level of demand.

The advantages that induce firms to opt for concentrated location can be grouped into three broad categories:³

1. economies internal to the firm, also called economies of scale. These arise from large-scale production processes yielding lower costs per unit of output.⁴ In order to reap the advantages of large-scale production, the firm concentrates all its plants in a single location. The advantages in this category derive, not from proximity to other firms, but from the pure concentration of activity in space;
2. economies external to the firm but internal to the sector, or localization economies. These spring from location in an area densely populated by firms operating in the same sector. Whereas scale economies depend on the size of the firm (of its plants), localization economies are determined by the size of the sector in a particular area with a wide range of specialized suppliers and in which skilled labour and specific managerial and technical expertise are available;
3. economies external to the firm and external to the sector, or urbanization economies. These derive from the high density and variety of productive and residential activities in an area; features which typify urban environments. The advantages in this category accrue from the presence of large-scale fixed social capital (urban and long-distance transport infrastructures, advanced telecommunication systems) and a broad and diversified intermediate and final goods market. These advantages increase with the physical size of the city.

All the above advantages result from the concentration of economic activities in space. However, there are two forces that work in the reverse direction and give rise to dispersed location. The first is the formation in the agglomeration area of increasing costs or diseconomies, these being (i) the prices of less mobile and scarcer factors (land and labour), and (ii) the congestion costs (noise and air pollution, crime, social malaise) distinctive of large agglomerations. These diseconomies are generated above a certain critical threshold.⁵ However, the second factor – transportation costs – is of greater interest, because these costs countervail the spatial concentration of activities whatever level of agglomeration has been reached. For in conditions of perfect competition, perfectly mobile production factors, fixed raw materials and demand perfectly distributed across the territory, the existence of transportation costs may erode the advantages of agglomeration until activities are geographically dispersed and the market becomes divided among firms, each of which caters to a local market.

The theory of localization defines ‘transportation costs’ as all the forms of spatial friction that give greater attractiveness to a location that reduce the distance between two points in space (e.g. production site and the final market; place of residence and the work-place; the raw materials market and the production site). Transportation costs are accordingly the economic cost of shipping goods (the pure cost of transporting and distributing them); the opportunity cost represented by the time taken to cover the distance which could instead be put to other uses; the psychological cost of the journey; the cost and difficulty of communication over distances; the risk of failing to acquire vital information.

Transportation costs are therefore essential to location theory in its entirety, for they differentiate space and enable its treatment in economic terms. They are, moreover, comprised in the concept of agglomeration economies as the costs of interaction and distance: if transportation costs were nil, there would be no reason to concentrate activities, because doing so would not produce ‘economies’. In this sense, agglomeration economies are ‘proximity economies’; they are, that is to say, advantages that arise from the interaction (often involuntary) among economic agents made possible by the lower amount of spatial friction in concentrated locations.

As a later chapter will show (Chapter 9), agglomeration and proximity form the linkage between location theory and the theory of regional development. Indeed, development theory in the 1970s and 1980s took agglomeration, in the sense of proximity, to be the decisive endogenous factor in cumulative and territorialized processes of economic development.⁶

Two distinct groups of theories on the location of industrial activities can be identified on the basis of objectives that they set themselves, and according to the hypotheses that they assume about the spatial structure of the market:

1. cost minimization theories. These hypothesize a punctiform outlet market and a punctiform source of raw materials supply located at different points of space, in order to investigate the location choices of firms at minimum transportation costs. In that they analyse the location choices of individual firms, these theories are based on a partial equilibrium framework;⁷
2. profit maximization theories. On the hypothesis that demand is geographically dispersed and supply is concentrated in some points of the market, these theories account for the division of the market among several firms in terms of profit maximization. They assume that the extent of each firm’s market and its location depend on consumer behaviour and on the location choices of other firms. These theories are conceived largely within a partial equilibrium framework; an exception is Lösch’s model, which envisages a general spatial equilibrium (several firms simultaneously in economic-location equilibrium).

Cost-minimization theories offer answers to questions such as the following: Given the price and location of raw materials and the outlet market, where does the firm locate? How do location choices change when one hypothesizes a place in which agglomeration economies (e.g. the greater availability and higher quality of labour, broader outlet markets) exist? Profit-maximization theories seek to answer questions such as these: Given a certain spatial distribution of demand, how do firms divide up the market? Once the firm’s location has been defined, how does it change with variations in the initial production conditions (e.g. variations in production or transportation costs) or in the location choices of other firms?

This chapter sets out the mai...