New Geography

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  • Industry And The Urge To Cluster

    What drives industry to locate in one region and not in the next?

    Economic geography – the distribution of economic activity over physical space – has always been central to economic development. Policy-makers trying to encourage economic activity to locate in under-developed regions want answers: Is it infrastructure? Fiscal incentives? Good business environment? Or could it be agglomeration – the compounding effect of industry clustering in a particular location?

    And if the key factor is indeed this critical mass, can the effect run from one type of industry to another? Do existing, more traditional manufacturing clusters attract newer services industry?

    The question of where and how services firms decide to locate themselves has become exceedingly central to understanding economic growth and development. Services, and especially knowledge-based services, now account for a greater proportion of advanced-country GDPs, and increasingly so for emerging economies.

    New Economic Geography (NEG) theory would argue that agglomeration advantages lock business activity into core regions. The core also supports the existence of intermediate industry in the periphery, and so specialized input-suppliers co-locate close by. For instance, think of Detroit’s production of automobiles and the auto-parts manufacturers who locate in geographically proximate Michigan, Ohio and Indiana.

    The theoretical business-economics literature would also argue that manufacturing and services are intricately linked in the production chain. For example, marketing services add the finishing touches in the final stages of a manufacturing process, or research and development services result in increased production within the “real” economy. Service inputs into production, such as design, technological refinements, and branding, account for a major part of value added in manufacturing industries. The result is that it is becoming difficult to identify where the product ends and where the service begins.

    These theories have been challenged by claims that services, as compared to manufacturing, are liberated from the tyranny of space, owing to advances in information and communication technologies. In addition, the ability to splice the service production chain more thinly, goes the argument, means that proximity may cease to be an important factor with regard to these industries.

    But some empirical research suggests that agglomeration forces may actually be stronger in the case of services – that service industries actually tend to cluster more strongly and more closely to existing urban or manufacturing agglomerations.

    How do we know this? It is true that while the interest in urban, regional and spatial economic theory has grown dramatically in the last few decades, empirical research has followed in fits and starts. Some historical evidence shows that manufacturing does indeed precede services, specifically producer services, in a city or city-region. Research in the United States in the mid-1990s, and then more recently, also demonstrates that financial and professional services firms often chose to locate themselves in geographic proximity to established manufacturing industrial areas.

    More macro-level North-South models of development also seem to lend credence to the idea that services cluster close to existing manufacturing companies. Research on firm location in Sweden has shown that producer services locate themselves close to manufacturing industry to benefit from accessibility to their customers, but that many producer services also look to supply other service industries. Similar research in Denmark shows that manufacturing and services can be so intricately linked in their production chains that firms across both types may decide simultaneously to choose one location over another.

    And there is yet another possibility. Research in Japan’s urban areas revealed that the presence of a large and growing service sector in an existing urban cluster could lead to the displacement of manufacturing units.

    There are two basic causes of clustering. The first is regional endowments such as land, climate, and waterways. The second is circularity in location choice, implying that firms want to be where large markets are, and large markets are where many firms are located.

    This logic may seem obvious now, but, as economist Paul Krugman notes, that wasn’t really the case before 1991. In the latter half of the 19th century, the emergence of the manufacturing belt in the United States was a turning point in the economic geography of the country. The belt – mainly New England, Middle Atlantic and east-North-Central regions – contained the majority of manufacturing employment up until the first half of the 20th century. It was a classic example of how concentration of firms in one region increased local demand and thus made the area attractive for other firms. Services industries, catering to both final consumption and to manufacturing, soon followed.

    What does all this tell us about how governments should focus their energies? If the whole point of policy were to encourage industrial growth in regions that were not previously favored by economic activity, then a multitude of factors would need to be considered: investments in educational infrastructure, and training and development of skilled labor are just some examples.

    If policy was aimed at the development of producer services industries, then it seems that a healthy manufacturing sector is vital to a healthy services sector. There is, however, an ongoing blurring of the distinction between what constitutes manufacturing and what constitutes services, and this transformation has stimulated new support functions that feed the production processes of both.

    If so, and if the different types of industry do simultaneously co-locate, then…the discussion is akin to going round the Mulberry bush.

    Megha Mukim is currently reading for a Ph.D at the London School of Economics. Prior to this she was a visiting fellow at the MacMillan Center for International and Area Studies at Yale University.

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  • Megha Mukim

  • Wisconsin Checks Out The Finland Club

    Our Central Wisconsin delegation journeyed to Finland in October, 2008. We definitely learned a few lessons that we’ll apply here at home, with the hope of moving our ability to compete globally to a much higher level.

    “Finland is not a country, it is a club” stated one of the many presenters we heard during our study tour. This perspective of how Finns see themselves says something valuable about what they believe it will take for them to compete in the changing global economy: a whole lot of cooperation, strong relationships and inter-connectedness!

    The notion of a “club” is that a group comes together around a common interest and finds value in the network, which the club provides by further fostering that common interest. This is what we found was happening in Finland. Similar in size to Wisconsin, the country rallies together to be competitive on a global scale. They view themselves as a club, in the context of bringing bright people together as a key to innovation and commercialization. They have developed, and continue to further develop, systems in their “club” to allow this to happen.

    Although Nokia is definitely the poster child in Finland’s quest to become a top performer in global competition, the country’s business community is not resting on its laurels. Instead, there’s a very clear, shared vision of the future of the country, with a focus on the investments that can make this future a reality.

    One example is the Oulu region’s concept of a Triple Helix to foster business development and innovation. The Triple Helix intertwines business, education and government in cooperation and collaboration to deliver a support system that fosters innovation for business development. We heard presentations from about 15 agencies, government departments, educational institutions, and business associations. Each one succinctly communicated the common vision of the Triple Helix and the plan for the region to compete globally and grow its economy. Within this shared vision, everyone understood their particular agency’s role, and knew what role others played.

    Our small, rural Central Wisconsin community has had a Finnish connection since 2000, when Stora Enso Oy purchased the Fortune 500 Wisconsin Rapids-based paper company conglomerate, Consolidated Papers. This sale shook up the century-long paternalistic culture and insulated economy. And the loss of more than 4,000 jobs made the community immediately face the reality of global competition.

    In response to the crisis, the Heart of Wisconsin Business & Economic Alliance, in partnership with the Community Foundation of South Wood County, kicked off the Community Progress Initiative, which incorporates systemic approaches similar to the Triple Helix model, and uses common vision as a compelling inspiration to actively engage the community in moving forward collaboratively, kind of like a “club.” The approach has had some proven success, with opportunities for bigger breakthroughs yet to come. Our Study Tour Team is comprised of representatives from business, government, education (K-12, technical college and university levels), engineering, sustainability, philanthropy, and economic development. We are all focused on implementing the concepts on innovation and project learning gained on the tour.

    Outaniemi Technology Hub, in Espoo, provides another example of a “club” type of approach to fostering innovation to compete globally. It bridges innovation and business, uniting academia, startups, SMEs (Small and Medium Enterprises) and anchor businesses in a meaningful way to market and promote technology business development. Outaniemi comprises the biggest concentration of R&D (research and development) and innovation services, facilities and hi-tech infrastructure in the Nordic Region. It links these entities together to create cooperative productivity that is greater than the sum of its parts. The Outaniemi linkage of 32,000 people – 16,000 students, 16,000 hi-tech professionals – 600 companies, and several world headquarters, together with world class research, has resulted in a highly functioning and successful ”innovation club.”

    How did Finland develop this ”club” culture? In the 1990’s, after suffering a serious recession, Finland applied Michael Porter’s industry cluster theory to look at their industries and areas of potential competitive advantage. In Porter’s book, Competitive Advantage of Nations, he had argued that successful firms are seldom alone. Frequently, a company’s dominant market share and accelerated growth are supported by a unique combination of firms tied together by knowledge and production flows. According to Porter, competitiveness originates from these unique combinations, clusters or development blocks. Their typical features are numerous interconnections between firms, technological spillovers, and externalities.

    While many of the connections are of an economic nature, social and environmental benefits are important as well. Defining formal boundaries for these clusters may be cumbersome and even irrelevant; the main feature of a cluster is interaction and interplay among the participants. The Finnish refer to this as “co-petition.” Through cooperation — working together in industry micro-clusters that interface with other micro-clusters — they become more effective at competing in a global marketplace. The “club” concept cross pollinates the clusters to inspire innovation.

    Here in Wisconsin, our Community Progress Initiative integrated a comprehesive system of community and economic development programs to develop relationships and a synergy across the community. This sparked interest in developing an entrepreneurial and small business support system and in forming industry cluster networks. Spinning out of the industry clusters has been the Ideas Incubator and Innovation Think Tank as vehicles through which to foster innovation for business applications. We are still at the infant stage in this process, although, with the foundation set, we are poised to advance our efforts. Lessons from Finland’s experience are guiding us to results. We’ve learned to grab that low hanging fruit and take steps towards long-term gains and bold innovative wins for our ”club.”

    A successful club has the belief and willingness to invest in making itself better. Finland is doing this, supporting innovation and entrepreneurship in public policy, and investing in R&D to the tune of more than $3200 Euros (that’s over $4,000 USD) per capita in some regions. The government investment arm, TEKES, grants money to private firms exploring innovation with good business model applications. Finland invests in its bread and butter, small business, concentrating on growth sector businesses of 20-100 employees. Some of the firms receiving investment from TEKES are not Finnish owned. For example, a Wisconsin Rapids-area firm could set up a Finnish branch office and apply for TEKES R&D funding. Hmmm, I think this could be worth exploring….

    The business of fostering innovation is long-term work. Finland has been successful at fast-tracking the moves that hold the competitive edge in technology innovation, and at applying the results to build economic prosperity. The country’s innovation system successfully converts R&D and educational capacity into industrial strengths.

    By applying some of these lessons learned in Finland to the impressive foundation we have laid through the Community Progress Initiative in our region, we hope to be as successful as they have been. We, too, are now working to foster innovation that assists our businesses, to work together in co-petition, and to grow our region’s economy.

    Anyone want to come join our club?

    Connie Loden is the Executive Director of the Heart of Wisconsin Business & Economic Alliance that coordinates community economic development projects in Central Wisconsin. An internationally recognized leader in rural development, she holds leadership roles with the Community Development Society and National Rural Development Partnership.

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  • Public Pension Troubles Loom for State and Local Governments

    We have watched with trepidation as the stock market declines and along with it the value of our retirement accounts. Yet with our personal accounts, it’s our own problem. When it comes to public pensions, it’s the taxpayer’s problem. Underfunded pensions could cut two ways, leading to much higher taxes and/or cuts in government spending.

    This is a particularly big issue here in my home state of Illinois. The Chicago Sun-Times just reported the Land of Obama has earned the dubious honor of having the most underfunded public pension plan in America.

    According to Professor Jeremy Siegel, the above-average returns of the stock market in the recent past have attracted the attention of public pension fund managers.

    The prospect of bigger returns has led managers to pour billions in public pensions into stock. Finance Professors Deborah Lucas and Stephen Zeldes report that the share of state and local (S&L) plan assets held in equities has greatly increased over time from an average of about 40 percent in the late 1980s to about 70 percent in 2007.

    In the current market environment, this exposure led to a loss of an estimated $1 trillion dollars over the past year. Are stocks likely to average annual returns of 10% for the next 20 years? Not likely, and that’s a big problem for both public pension funds, and for the poor taxpayer.

    Equity investing will see many challenges in the coming years. Here are some issues to consider. The reaction to Enron’s bankruptcy was much tighter regulation on corporate accounting. This led to the infamous Sarbanes-Oxley law which has made it far less desirable to run public investment funds and slowed the development of new IPOs. The result, as Joe Weisenthal reported in February of 2007, was a spectacular rise in private equity funds, such as the infamous hedge funds, which contributed mightily to the recent financial meltdown.

    Successful IPOs eventually join the major indexes which help the long run drive equity returns. Fewer IPOs mean less opportunity for investing in listed equities. This will make it harder for pension funds to enjoy higher returns.

    And then there are some demographic concerns. In 2008 the first cohort of baby boomers retired. Many more will follow. This will put increasing strains on all equity investors. Eventually, pension fund managers will have to be net sellers of equities to raise cash for the retiring boomers. No one can say with certitude when this trend will hit critical mass, but when pension funds become net sellers stocks are almost certain to go down.

    The giant bull market of 1982-2000 was driven not only by favorable demographics but also lower marginal income tax rates, cuts in capital gains taxes, and lower inflation. All three conditions could very likely be much higher in the next 20 years. President Obama has openly talked about higher capital gains taxes and the rich being obligated to fund expanded government programs. Recent increases in the money supply by the Federal Reserve Board point to potentially much higher rates of inflation and interest rates. Equities will perform poorly in such an environment.

    American equity investors are in a new era with the federal government making direct investments in private companies. What are the likely results of the federal government controlling an industry? Not good. The TARP program quickly expanded to taxpayers funding car companies that under normal market conditions would have been forced into bankruptcy. What other industries does the federal government have in mind for taking over? Is the medical industry next? Drug companies? Until recently these scenarios were unimaginable.

    All this uncertainty, at very least, is quite bad for equity investing.

    The TARP program is likely to have profound long-term affects on capital markets. With the government having a big stake in major banks, future business loans could potentially be influenced by politicians who regulate the banks. This will lead to a massive misallocation of resources. Will the federal government encourage more homeownership when the housing market has a huge supply? Only time will tell. Will a bank branch be allowed to close in a powerful Congressman’s district?

    As equities lose their attractiveness, public pensions may have to look to corporate bonds and real estate to get investment returns. Are these investments likely to produce historical rates of return that equities have? It’s very unlikely. Governments may be forced to conduct fire sales of their properties just to raise cash to meet their pension obligations.

    Something will have to change. Without a restored boom in stock prices, public pension funds will have a very hard time meeting their obligations. Either governments will have to increase taxes – perhaps dramatically – or force public employees to endure the same risks and potentially anemic returns the rest of us may be up against. Given the size of these funds, and the enormous political power of government workers, this may create one of the major political conflicts of the coming decade.

    Steve Bartin is a resident of Cook County and native who blogs regularly about urban affairs at http://nalert.blogspot.com. He works in Internet sales.

  • Connie Loden

  • Memorialist of Suburbia

    John Updike, the bard of the suburbs, died this week. He was one of the first great American writers to revel in the opportunity, beauty and convenience that the suburbs have long reflected. His voice, first found in the sixties, acted as a reasonable anchor in the tempest of radicalism that swept through the country. He empathized with the American dream rising in the raw suburbs being carved from agricultural land.

    Where ancestors once had wrestled a living from the soil, Updike’s generation found comfort, convenience and a dream. They found plenty where a generation previous only found enough to keep them alive. At a time when academics, avant-garde filmmakers and urban intellectuals scoffed at suburbia, Updike explained it. He understood the obvious reasons – “practical attractions: free parking for my car, public education for my children, a beach to tan my skin on, a church to attend without seeming too strange”. That is still what draws people to the edge of town.

    Updike viewed the miles of identical houses the middle class aspired to as the pinnacle of civilization. He was never condescending. He genuinely loved what the suburbs represented and what they offered the masses moving from the cramped quarters of the ghettos and slums of the pre-war cities. He himself knew firsthand the other source of suburban migrants – the hardscrabble rural environs where life was often both difficult and limited.

    Updike wanted nothing more than the convenience and steady food and work that he could find in the suburbs of Boston. The cold, bleak, boring hell of rural life was not for him. He saw nature as something that his religious sensibilities told him it was: a chaotic force to be tamed for the benefit of man.

    His novels described the lives of characters in the sixties and seventies, caught up in the whirlwind of suppressed and released human desires which challenged these suburban dreamers. His sex scenes were more biological than erotic. They showed the new morality that was being formed in the suburbs, the breaking down of the old structures of the village and the urban neighborhood, which in many essentials were the same thing.

    In Seek My Face he talks of Manhattan by saying that each block represented a village in the old country. That was fine for the first generation, which needed that fabric of support and familiarity but that was not enough of a dream for the next generation. The Dream was the cheap Cape Cods that were being erected by the thousands over the Nassau County line by the Levitt brothers.

    Updike presented the suburbs for what they were to his generation: an escape from the villages and suffocating urban neighborhoods that trapped the previous generation. The freedom they gained was that of the nuclear family structure – the end to the rule of elders, cousins and priests. He celebrated suburbia as it rarely has been – as a peculiarly American miracle. It did not need to be demeaned, but seen as the perfection of thousands of years of evolution, the home to thousands of hoping, dreaming members of the middle class. His description of the car is no less lyrical. It was the convenience but it was more than that. In one short story he describes the purchase of a new car. The rush of excitement associated with the purchase and the affection that forms between a family and a car. He then described the neglect that crept in as the car aged until it lies abandoned in the front yard waiting to be turned in for a newer car.

    The mobility it represented is tempered with the ever present hope for the future that defines so much of what America is. The car is mobility; he describes the manner by which it frees passengers from the landscape just as it frees them from the tyranny of public transit. The car is the cocoon that is an extension of the owner’s personality, a part of who he is. It is a symbol of power and prosperity. It is an object of love.

    Then there was the chance to go to church without feeling like a freak. The multicultural downtowns are filled with houses of worship catering to all classes of people. There are numerous minority churches in Manhattan catering to different races and other houses of worship for the other sundry religions in the immigrant communities, but the middle class churches are being taken over, bought out and torn down in the center. The mainline churches and megachurches that most white middle class Americans call home are on the edge of town. Updike was a master at describing the religious experience of the suburbs. In A Month of Sundays Updike describes the breakdown of a Presbyterian pastor into a nymphomaniac. It is also filled with suburbs, sex and theology. Critics stated that the narrator’s sermons are some of the most eloquent since John Donne and are a wonderful representation of the dichotomy in an America that separates church and state but can never quite get over the fact that the Pilgrim Fathers set up a Theocracy on the banks of the Charles River. The combination of the profane and the divine is apparent on the outskirts of any American city where Wal-Marts abut megachurches; some megachurches were even built in the massive husks of abandoned big box stores.

    He was born in the depth of the depression to parents who dreamed of him being more and he described the quotidian with a lyricism that was an epiphany. The suburbs were a thing of beauty. He was a man who loved America for living in the future tense but constantly looking to the past for guidance. America lost one of its greatest voices in him.

    Kirk Rogers lives in Germany where he teaches languages and American culture at the Universität Erlangen-Nürnberg. He has been an avid reader of Updike since his early teens.

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