Regional Economics Lecture 3 Sedef Akgüngör

Cluster is, the logical pattern for units of an output- oriented activity whose markets are concentrated at one or a few locations, and correspondingly for units of an activity oriented to inputs whose source locations are few. Cluster is, the logical pattern for units of an output- oriented activity whose markets are concentrated at one or a few locations, and correspondingly for units of an activity oriented to inputs whose source locations are few. There is a high concentration of producers and suppliers of such theatrical inputs as actors, stage designers, and theatrical makeup specialists in Los Angeles and New York because so much movie making and theater activity is concentrated there. The making of vintage wines is confined to the relatively few areas where the right kinds of grapes will flourish. There is a high concentration of producers and suppliers of such theatrical inputs as actors, stage designers, and theatrical makeup specialists in Los Angeles and New York because so much movie making and theater activity is concentrated there. The making of vintage wines is confined to the relatively few areas where the right kinds of grapes will flourish.

In New York, large advertising agencies are so clustered along a section of Madison Avenue that the street has given its name to the industry. In New York, large advertising agencies are so clustered along a section of Madison Avenue that the street has given its name to the industry. Similarly, a section of Seventh Avenue is preempted by the garment trades, part of Forty-seventh Street by diamond merchants, and so on for many other specialties. Similarly, a section of Seventh Avenue is preempted by the garment trades, part of Forty-seventh Street by diamond merchants, and so on for many other specialties. The common feature of all such clusterings is that each unit finds the location good because of the presence of the others. There is a positive mutual attraction rather than a repulsion. The explanation of such mutual-attraction clusters lies in special characteristics of the activity itself, its markets, or its suppliers. The common feature of all such clusterings is that each unit finds the location good because of the presence of the others. There is a positive mutual attraction rather than a repulsion. The explanation of such mutual-attraction clusters lies in special characteristics of the activity itself, its markets, or its suppliers.

In some activities, the basic reason for the agglomerative tendency is that the outputs of individual units are not standardized; they are not perfect substitutes for one another, and moreover, they differ in such manifold and changing ways that they cannot be satisfactorily compared by the buyer without actual inspection. In some activities, the basic reason for the agglomerative tendency is that the outputs of individual units are not standardized; they are not perfect substitutes for one another, and moreover, they differ in such manifold and changing ways that they cannot be satisfactorily compared by the buyer without actual inspection. The locational significance of this characteristic can best be seen by a pair of contrasting examples. The locational significance of this characteristic can best be seen by a pair of contrasting examples.

A manufacturing firm buying sheet steel simply decides on its specifications and then finds out which steel producer will give the best price and fastest delivery. A visit to warehouses or rolling mills to look over the sheets and make a selection is unnecessary, because the specifications themselves (plus conceivably a sample sent for testing in the buyer’s plant or laboratory) fully identify the characteristics of the steel. Consequently, the transfer costs involved are those of shipping the steel from producer to user, and there is nothing in the situation that would make it desirable or convenient for the rival sheet steel producers to be concentrated in one place. A manufacturing firm buying sheet steel simply decides on its specifications and then finds out which steel producer will give the best price and fastest delivery. A visit to warehouses or rolling mills to look over the sheets and make a selection is unnecessary, because the specifications themselves (plus conceivably a sample sent for testing in the buyer’s plant or laboratory) fully identify the characteristics of the steel. Consequently, the transfer costs involved are those of shipping the steel from producer to user, and there is nothing in the situation that would make it desirable or convenient for the rival sheet steel producers to be concentrated in one place.

Contrast this with a man or woman buying a car or a new hat, a department store selecting its line of fall fashions, or a fashion designer searching for something simply devastating in novelty buttons. Contrast this with a man or woman buying a car or a new hat, a department store selecting its line of fall fashions, or a fashion designer searching for something simply devastating in novelty buttons. The items cannot be adequately described in a catalog, and it would be much too expensive and time consuming for the producers to supply each prospective buyer with a full set of samples. The items cannot be adequately described in a catalog, and it would be much too expensive and time consuming for the producers to supply each prospective buyer with a full set of samples. Under these circumstances, the "demand" is not so much demand for specific items as it is demand for a varied display of products; and the wider the variety presented at a particular location, the more demand that location will attract. Under these circumstances, the "demand" is not so much demand for specific items as it is demand for a varied display of products; and the wider the variety presented at a particular location, the more demand that location will attract.

These examples illustrate one important kind of external economy of agglomeration of an activity— "external" to the individual unit involved because the advantages depend on how many other units of its type are joining it to make a cluster that attracts demand These examples illustrate one important kind of external economy of agglomeration of an activity— "external" to the individual unit involved because the advantages depend on how many other units of its type are joining it to make a cluster that attracts demand

The externalities associated with the size of a cluster are by no means limited to those that enhance demand as a result of the characteristics of shopping behavior. Some closely analogous external economies of agglomeration involve cost and supply considerations, and these tend to affect many of the same activities. The externalities associated with the size of a cluster are by no means limited to those that enhance demand as a result of the characteristics of shopping behavior. Some closely analogous external economies of agglomeration involve cost and supply considerations, and these tend to affect many of the same activities.

If products are complexly differentiated and changeable from one day or week to the next, the chances are that at least some of the inputs also share those characteristics. If products are complexly differentiated and changeable from one day or week to the next, the chances are that at least some of the inputs also share those characteristics. Thus a fashion garment shop will have a constantly changing need for different fabrics, thread, buttons, zippers, and the like. Thus a fashion garment shop will have a constantly changing need for different fabrics, thread, buttons, zippers, and the like. With the nature of the output continually changing, manpower needs can vary unpredictably and suddenly; with speedy delivery at a premium and production scheduling intricate, equipment repairs and parts must be quickly available. With the nature of the output continually changing, manpower needs can vary unpredictably and suddenly; with speedy delivery at a premium and production scheduling intricate, equipment repairs and parts must be quickly available.

Every one of these input requirements, plus others, is best satisfied in a tight cluster. The basic reason can be made clear by the following example. Every one of these input requirements, plus others, is best satisfied in a tight cluster. The basic reason can be made clear by the following example. Suppose we have a small plant that manufactures ladies’ coats. A long sequence of separate operations is involved, including such operations as cutting and binding the buttonholes. Suppose we have a small plant that manufactures ladies’ coats. A long sequence of separate operations is involved, including such operations as cutting and binding the buttonholes. Specialized equipment exists for making buttonholes rapidly and cheaply in large quantities, but it represents a sizable investment. Specialized equipment exists for making buttonholes rapidly and cheaply in large quantities, but it represents a sizable investment.

Individual coat manufacturers would not find it worthwhile to invest in such a machine, since they could not keep it busy all the time; they have to resort to making their buttonholes in a slower way, involving greater labor cost. Individual coat manufacturers would not find it worthwhile to invest in such a machine, since they could not keep it busy all the time; they have to resort to making their buttonholes in a slower way, involving greater labor cost. However, if they locate in a cluster with enough other clothing manufacturers, their combined need for buttonholes may suffice to keep at least one of the specialized buttonhole machines reasonably busy. Then a separate firm specializing in buttonhole making joins the cluster. The clothing manufacturers contract that operation out to that firm, to the advantage of all concerned, including the customer who gets the coat cheaper. However, if they locate in a cluster with enough other clothing manufacturers, their combined need for buttonholes may suffice to keep at least one of the specialized buttonhole machines reasonably busy. Then a separate firm specializing in buttonhole making joins the cluster. The clothing manufacturers contract that operation out to that firm, to the advantage of all concerned, including the customer who gets the coat cheaper.

First, we have explained an external economy for the clothing manufacturers in terms of the internal economies entailed in specialized operations. First, we have explained an external economy for the clothing manufacturers in terms of the internal economies entailed in specialized operations. The buttonhole-making establishment and other such auxiliary suppliers must have at least a certain minimum amount of business or they cannot cover their fixed costs. The buttonhole-making establishment and other such auxiliary suppliers must have at least a certain minimum amount of business or they cannot cover their fixed costs.

Second, the result of the mutually beneficial symbiosis of the garment makers and the buttonhole maker is that the former are now also more specialized. They are confining themselves to a narrower range of operations, and for any given level of output of coats they will have smaller plants and fewer employees; that is, the productivity of inputs will be enhanced. Second, the result of the mutually beneficial symbiosis of the garment makers and the buttonhole maker is that the former are now also more specialized. They are confining themselves to a narrower range of operations, and for any given level of output of coats they will have smaller plants and fewer employees; that is, the productivity of inputs will be enhanced.

If, as the result of specialization, the location unit within an activity cluster can take advantage of internal economies of scale, subsequent increases in productivity will move the unit down along its average total cost curve. If, as the result of specialization, the location unit within an activity cluster can take advantage of internal economies of scale, subsequent increases in productivity will move the unit down along its average total cost curve. Thus in panel (a) of Figure 5-1, location within the cluster has made it possible to increase the rate of output from Q0, to Q1, with a consequent decrease in average total costs from ATC() to ATC1. Thus in panel (a) of Figure 5-1, location within the cluster has made it possible to increase the rate of output from Q0, to Q1, with a consequent decrease in average total costs from ATC() to ATC1.

The increased efficiency in production that results from the cluster of activity may show up also as a decrease in average total costs at each rate of output. The increased efficiency in production that results from the cluster of activity may show up also as a decrease in average total costs at each rate of output. As shown in panel (b) of Figure 5-1, this would imply a downward shift in costs from ATC to ATC’. As shown in panel (b) of Figure 5-1, this would imply a downward shift in costs from ATC to ATC’. Reasons: Reasons: The products and services they produce will be available to all buyers at lower cost. The products and services they produce will be available to all buyers at lower cost. Savings in transfer costs realized by members of the cluster. Savings in transfer costs realized by members of the cluster. The ability of group members to maintain smaller inventories in the face of demand or supply uncertainties The ability of group members to maintain smaller inventories in the face of demand or supply uncertainties Increases in labor productivity resulting from specialization in the work place Increases in labor productivity resulting from specialization in the work place Increased efficiency in management and organization. Increased efficiency in management and organization.

(1) economies associated with size of the individual location unit (plant, store, or the like); (2) economies associated with the size of the individual firm; and (3) economies associated with the size of the agglomeration of that activity at a location. (1) economies associated with size of the individual location unit (plant, store, or the like); (2) economies associated with the size of the individual firm; and (3) economies associated with the size of the agglomeration of that activity at a location. We can refer to these, for brevity’s sake, as unit, firm, and cluster economies We can refer to these, for brevity’s sake, as unit, firm, and cluster economies

essential part of a cluster that is advantageous to garment manufacturers is a variety of such related activities as machine rental and repair; designing; provision of special components such as buttonholes, fasteners, and ornaments; trucking services; and so on. essential part of a cluster that is advantageous to garment manufacturers is a variety of such related activities as machine rental and repair; designing; provision of special components such as buttonholes, fasteners, and ornaments; trucking services; and so on.

Understanding Key Industries: Required Data Total employment for your area (current year and an earlier year) Total employment for your area (current year and an earlier year) Employment by industry for your area (current year and an earlier year) Employment by industry for your area (current year and an earlier year) Total national employment (current year and an earlier year) Total national employment (current year and an earlier year) National employment by industry (current year and an earlier year) National employment by industry (current year and an earlier year) Payroll by industry for your area Payroll by industry for your area Earnings by industry for your area Earnings by industry for your area Number of firms by industry for your area Number of firms by industry for your area

Step 1: Share of local employment For each of your industries determine its share of all local employment and its share of local employment in its sector. Step 1: Share of local employment For each of your industries determine its share of all local employment and its share of local employment in its sector.

Step 2: Change in employment Although an industry may not currently register one of the highest shares of employment, it may be outstripping all other firms in terms of growth in employment. In this case, you would want to study the industry and try to understand what is driving its growth. Step 2: Change in employment Although an industry may not currently register one of the highest shares of employment, it may be outstripping all other firms in terms of growth in employment. In this case, you would want to study the industry and try to understand what is driving its growth.

Step 3: Location quotients The location quotient is a measure of an industry's concentration in an area relative to the rest of the nation. It compares an industry's share of local employment with its share of national employment. Step 3: Location quotients The location quotient is a measure of an industry's concentration in an area relative to the rest of the nation. It compares an industry's share of local employment with its share of national employment.

Industry Location Quotient = (Employment in Industry/Total Employment in Base)/ (National Employment in Industry/Total National Employment) Industry Location Quotient = (Employment in Industry/Total Employment in Base)/ (National Employment in Industry/Total National Employment)

A location quotient greater than one implies that the industry is producing more goods and services than are consumed locally. Thus, the industry is exporting the goods or services out of the area and, in the process, bringing new dollars into the area. Industries that bring dollars into the area help the local economy grow. A location quotient greater than one implies that the industry is producing more goods and services than are consumed locally. Thus, the industry is exporting the goods or services out of the area and, in the process, bringing new dollars into the area. Industries that bring dollars into the area help the local economy grow.

Step 4: Change in location quotients Another way to use location quotients is to look at how they have changed over a period of time. This comparison will give you an idea of whether each industry is increasing or decreasing its concentration and importance in your area relative to other areas. Step 4: Change in location quotients Another way to use location quotients is to look at how they have changed over a period of time. This comparison will give you an idea of whether each industry is increasing or decreasing its concentration and importance in your area relative to other areas.

Industry clusters in Turkey Engineering Engineering Production and Processing of Field Crops Production and Processing of Field Crops Stone-Based Industry Stone-Based Industry Packaged Food Products and Beverages Packaged Food Products and Beverages Textile Textile Media and Services Media and Services Natural Resource Based Industries Natural Resource Based Industries Oil Based Industries Oil Based Industries Chemicals Chemicals Leather Leather

ChemicalsEngineeringLeather Media and Services Natural Resource Based Packaged Food Products Production and Processing of Field Crops Stone BasedTextile İstanbul (İstanbul) 2,111,011,821,610,600,390,110,821,16 Ankara (Ankara) 0,721,360,873,000,861,260,831,640,32 İzmir (İzmir) 0,141,091,350,990,471,972,750,970,71 Bursa (Bursa, Eskişehir, Bilecik) 0,010,880,200,370,701,410,141,071,31 Kocaeli (Kocaeli, Yalova, Bolu, Sakarya, Düzce) 1,871,520,000,192,500,940,221,860,30 Tekirdağ (Tekirdağ, Kırklareli, Edirne) 0,000,420,000,290,160,711,620,621,76 Adana (adana- mersin) 0,000,510,000,660,940,861,591,201,27 Aydın (Aydın- Denizli-Muğla) 0,610,260,000,410,170,360,100,292,19 Antalya (Antalya-Isparta - Burdur) 2,280,600,00 2,984,811,870,17

ChemicalsEngineeringLeather Media and Services Natural Resource Based Packaged Food Products Production and Processing of Field Crops Stone BasedTextile Balıkesir (Balıkesir- Çanakkale) 0,000,021,941,480,008,792,700,870,14 Zonguldak (Zonguldak- Karabük-Bartın) 0,004,440,001,570,280,480,000,300,00 Manisa (Manisa, Uşak, Kütahya, Afyon) 0,570,312,490,440,162,692,212,160,56 Konya (Konya- Karaman) 0,002,560,000,980,561,551,971,140,14 Gaziantep (Gaziantep- Kilis-Adıyaman) 0,000,020,430,000,130,880,320,442,22 Hatay (Hatay-Osmaniye- Kahramanmaraş) 0,004,570,00 0,092,310,140,00 Kayseri (Kayseri-Sivas- Yozgat) 0,001,290,00 3,180,580,491,040,88 Kırıkkale(Kırıkkale- Nevşehir-Kırşehir-Niğde- Aksaray) 1,661,630,00 2,610,953,041,600,00 Samsun (Samsun- Amasya-Çorum -Tokat) 0,000,681,140,000,730,1112,101,010,05

ChemicalsEngineeringLeather Media and Services Natural Resource Based Package d Food Products Production and Processing of Field Crops Stone BasedTextile Trabzon(Trabzon-Rize- Artvin-Giresun-Ordu- Gümüşhane) 0,280,050,000,6013,920,240,810,380,00 Malatya (Malatya- Elazığ-Tunceli-Bingöl) 0,002,160,00 0,071,759,440,00 Kastamonu (Kastamonu- Sinop-Çankırı) 0,00 5,250,00 5,852,700,00 Erzurum ( Erzurum- Erzincan- Bayburt) 0,000,409,220,00 2,2512,890,00 Şanlıurfa (Diyarbakır- Şanlıurfa) 0,000,640,00 5,910,801,410,59 Mardin (Batman-Mardin- Siirt-Şırnak) 0,00 10,601,391,271,260,00 Ağrı (Kars-Iğdır-Ağrı- Ardahan) 0,00 14,970,00 15,660,00 Van (Van-Hakkari-Bitlis- Muş) 0,00 9,280,00 1,6812,660,000,32

İstanbul district: Textile and engineering İstanbul district: Textile and engineering Bursa, Eskişehir, Bilecik: Textile and engineering. Furniture. Bursa, Eskişehir, Bilecik: Textile and engineering. Furniture. Kocaeli, Sakarya, Düzce, Bolu, Yalova: Textile and engineering Kocaeli, Sakarya, Düzce, Bolu, Yalova: Textile and engineering İzmir: Textile and stone based industries, field crops İzmir: Textile and stone based industries, field crops Tekirdağ, Edirne, Kırklareli: Textile and leather Tekirdağ, Edirne, Kırklareli: Textile and leather Ankara district: Engineering, furniture Ankara district: Engineering, furniture Kayseri: Furniture Kayseri: Furniture Gaziantep: Textile Gaziantep: Textile Çorum, Denizli, Yozgat, Çankırı, Niğde, Nevşehir, Kırşehir are considered as developing industry districts. Çorum, Denizli, Yozgat, Çankırı, Niğde, Nevşehir, Kırşehir are considered as developing industry districts.

The Fashion and Textile Cluster (FTC) project is financed by the European Union and the beneficiary is the Turkish Small and Medium sized Enterprises (SMEs) in the Textile and Clothing sector (T/C), represented in this instance by ITKIB(Istanbul Textile and Apparel Exporters’ Union). The Fashion and Textile Cluster (FTC) project is financed by the European Union and the beneficiary is the Turkish Small and Medium sized Enterprises (SMEs) in the Textile and Clothing sector (T/C), represented in this instance by ITKIB(Istanbul Textile and Apparel Exporters’ Union).

The overall objective for the FTC project is to increase the international competitiveness of SMEs in the T/C sectors in Turkey. In addition there is a need to increase the level of networking among SMEs in the T/C sector at local, national and European levels as well as with business support organisations and related structures. The overall objective for the FTC project is to increase the international competitiveness of SMEs in the T/C sectors in Turkey. In addition there is a need to increase the level of networking among SMEs in the T/C sector at local, national and European levels as well as with business support organisations and related structures.

To strengthen public and private support structures for SMEs in the T/C sector, and enable the capacity of Turkish Textile and Clothing sector to be improved with the establishment of a Cluster Coordination Agency the following supporting institutions will be established : To strengthen public and private support structures for SMEs in the T/C sector, and enable the capacity of Turkish Textile and Clothing sector to be improved with the establishment of a Cluster Coordination Agency the following supporting institutions will be established : Fashion Institute. Fashion Institute. Research and Development Centre Research and Development Centre Consultancy Centre Consultancy Centre

Figure 6.2 Diamond framework of competitive advantage Source: Adapted from Porter (1990), figure 3.1, p. 72.