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Industrial Clusters and Micro and Small Enterprises in Africa
human resources in the film and entertainment industries in Hollywood, California. • Specialized intermediate inputs and services. Agglomeration of industries also attracts specialized suppliers of inputs and services. Similar to the labor market pooling effect, specialized suppliers of inputs and services emerge both internally (for example, some cluster-based enterpreneurs shifting from producers to providers of business support services) and externally (attracting outside suppliers and services). The economic geography model (more precisely “new economic geographyâ€? model) provides a framework for understanding how economic activities can concentrate in certain areas.2 The model asserts that transportation costs can lead industries to agglomerate in certain locations to capture the agglomeration externalities discussed above.3 With prohibitively high transportation costs, a priori, industries are dispersed across various locations, because it is optimal for firms to be located close to consumers. The extreme opposite occurs when there are no transportation costs. With no transportation costs, industries are again dispersed across various locations because location per se does not create any productivity differential. With an intermediate level of transportation costs, co-location with local consumers brings smaller benefits to firms than co-location with other firms because of agglomeration externalities among firms. This is particularly true when product differentiation (and division of tasks) encourages firms to build interfirm networks of intermediate input suppliers and buyers. These interfirm linkages, as well as transportation cost savings in firm-to-firm shipping of materials, lead to physical agglomeration of industries in specific locations. Essentially, the positive externalities drive agglomeration. Product differentiation enables firms to build buyer-supplier relationships of intermediate inputs (both goods and services) locally within clusters. This makes co-locating with other firms producing differentiated products attractive. A skilled labor force that moves into locations where industries agglomerate also enhances the benefits of co-locating with other firms. The increased supply of skilled labor and providers of intermediate inputs (both goods and services) generates gains in efficiency and productivity among producers of final goods in the cluster (backward linkage effect). The higher productivity attracts more firms to the cluster, which creates new demand for skilled labor and specialized intermediate inputs of both goods and services (forward linkage effect). The backward and forward linkage effects within clusters are illustrated in figure 3.1.4