6 Can Southeast Asian Tiger Economies Become Innovative?
Industrial Location The trends in the composition of trade and distribution of investment among industries provide a perspective on an economy’s evolution and potential. These two factors indicate where production and technological capabilities are accumulating, how much deepening and diversification are occurring, and what the scope is for gains in productivity through embodied technological change and learning by doing. Another equally vital perspective is derived from the distribution of the production activities and investment among the main urban centers. Research on urban economies indicates that productivity and innovation are linked to the size and other characteristics of urban centers. In other words, factor productivity and the likelihood of business innovation, whether in electronics or in finance, are affected by location. Building innovation capability starts with location. There are four findings of relevance for Malaysia as its business community explores new industrial directions.1 First is the evidence of substantial agglomeration economies as city size grows.2 These agglomeration economies derive from a number of sources including (a) the rising scale of the local product market; (b) the size and density of the local market for factors (especially labor skills); 1
This section is based on Yusuf (2007). See Duranton (2008) for a framework analyzing urbanization and the growth of cities in developing countries. See Au and Henderson (2006a); Coulibaly, Deichmann, and Lall (2007); and Overman, Rice, and Venables (2007) for various ways by which to measure urbanization and localization economies. See Rosenthal and Strange (forthcoming) for the link between agglomeration and entrepreneurship and Kahn (forthcoming) on the cost of agglomeration. See Spence, Annez, and Buckley (2009) for a recent survey on the relationship between urbanization and economic growth. 119
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