The regional concentration of industries and the performance of firms: a multilevel approach.
| Autor | Ferreira, Fernando Coelho Martins |
| Cargo | Report |
INTRODUCTION
The regional concentration of industries, i.e. the location of a few, well-defined industrial sectors in a region (Brakman, Garretsen, & Marrevijk, 2001), is a phenomenon that is far more common than usually imagined, and not just limited to such classic examples like Silicon Valley and Route 128. The reasons for their origins can be linked to very distinct factors. While some industries may be concentrated in a region due to the availability of specific resources, proximity to consumer markets, or even as a historical accident, other industries do not have any natural tendency towards a concentrated location (Mori, Nikishimi, & Smith, 2005).
Clusters and Industrial Districts, the concepts most commonly associated with the phenomenon of regional concentrations, obtained a projection that exceeded academic boundaries. Vom Hofe and Chen (2006) state that since the early 1990s analyses of industrial clusters as a new alternative strategy of economic development have proliferated. Clusters, and their like, have been recognized as a source of competitive advantage, capable of leveraging the competitiveness of countries and regions and providing firms located within their borders with superior performance (Boasson, Boasson, Macpherson, & Shin, 2005).
Perhaps the strongest reason for the growing interest in industrial concentrations is precisely the emergence of evidence suggesting that location in these regions can provide superior performance to firms (Arikan, 2009). In the literature, examples abound of studies confirming a positive relationship between industrial concentration and performance. Within some more recent research, operational measures such as innovation rates (Caner & Hall, 2006; Porter, 2003; Saxenian, 1996) and staff turnover (Fallick, Fleischman, & Rebitzer, 2006) have been used to establish this relationship. Others have confirmed the influence of industrial concentration through measures of growth, such as the growth of demand (Chung & Kalnis, 2001), wages (Porter, 2003) and jobs (Brito, Brito, Szilagyi, & Porto, 2008; Holmes & Stevens, 2002; Porter, 2003). Even the market share of companies was used to confirm this relationship (Sakakibara & Porter, 2001).
The results of these and several other studies may suggest that the evidence in favor of location in concentrations is unquestionable. However, these studies, prevalent as they are, have begun to share room with research that, at the very least, questions this relationship.
Many of the researchers who raise this question point out the methodological weaknesses of some of these studies. Some authors, for example, claim that the supposed positive relationship between concentration and performance has little empirical support, emphasizing that the lack of systematic data and appropriate measures of performance undermine the reliability of studies that claim such a relationship (Appold, 1995; Malmberg & Power, 2005). Several of the models used in these studies suffer from serious problems of estimation, casting doubt on the findings derived from them (Hanson, 2001).
Pouder and John (1996) observed biased results in several studies that found a positive relationship between industrial concentration and performance. Their analyses referred only to periods in which concentrations were not subjected to any kind of crisis, without considering the performance of clustered firms in trying times.
Appold (1995), when analyzing a random sample of almost 1,000 firms in the metallurgy industry, found no evidence to support the hypothesis of superior performance in terms of concentrations. Furthermore, no objective outcome was found to support the recurring idea that the small and medium sized businesses within the concentrations were able to overcome the limitations intrinsic to their nature, such as the lack of economies of scale (Becattini, 1991; Boschma & Lambooy, 2002). These authors, however, are not the only ones who present contrary evidence concerning a positive relationship between localization within industrial concentrations and performance. Dekle (2002), Ferreira (2005) and George and Zaheer (2006) are other examples of studies that accordingly add to the list.
Contradictory evidence in studies of the relationship between industrial concentration and performance open avenues for conducting studies that explore the effect of location in concentrations on the performance of firms from another perspective.
The main objective of this work is to measure the resulting effect of location in concentrations, comparing the results obtained with those of companies that are not in areas of regional concentration. Therefore, the unit of analysis is the firm. In order to compare the performance of concentrated companies with companies that are geographically isolated, financial measures which are directly or indirectly related to the bottom line of companies' performance will be used.
Although some industrial concentrations might evolve into clusters or industrial districts, this study will still treat all these correlated phenomena as essentially industrial concentrations in order to avoid the risk of giving them the wrong classification within the taxonomy of industrial concentrations, as recommended by some authors (Ferreira, 2005; Martin & Sunley, 2003; Van Der Linde, 2002).
This paper is structured as follows: first, the literature review is presented, which forms the basis for structuring the hypotheses of this study; this is followed by the research methodology; finally, the results of the study are presented along with their primary implications and the study's limitations.
LITERATURE REVIEW
Marshall (1985) was a pioneer in establishing a relationship between concentration and performance. He noted that firms that were concentrated in some regions of England benefited from certain advantages when compared to those that lay outside these concentrations. Examples of these advantages included savings in equipment and labor costs and a higher capacity for innovation.
The concentrated areas, from that moment on, gained recognition as an environment characterized by a large flow of knowledge, intense specialization of labor and the existence of a large network of subsidiary industries and specialized machinery (Marshall, 1985), enabling them to provide products and services at competitive costs (Floysand & Jakobsen, 2002; You & Wilkinson, 1994).
These characteristics would generate cost efficiencies in companies that were geographically concentrated, derived from economies of scale and the specialization of labor and technology, or a combination of these factors (Hoover, 1948). Once a concentration is established, the returns to scale achieved by firms regionally concentrated would stimulate the establishment of new firms in the region (Martin & Sunley, 1996; Porter, 1998a).
These pecuniary externalities, achieved when the presence of a new firm results in positive returns (profits) for all firms (Meardon, 2000), would be critical in location decisions (Krugman, 1993). However, these would not be the only externalities from which geographically concentrated firms would benefit. There would also be externalities associated with the direct--non mediated by the market--interdependence of firms (Scitovsky, 1954).
These economies, also known as dynamic or technological externalities, would have significant impact on innovation and growth, as well as carrying considerable weight in the location decisions of businesses (Henderson, Kuncoro, & Turner, 1995; Ketelhohn, 2002).
These dynamic externalities would be the result of a long history of interactions among concentrated firms, leading to the construction of distinct knowledge, capable of creating value available only to concentrated firms (Benneworth, 2002; Hakanson, 2004; Porter, 1998b), due to its tacit, non codified character (Boschma & Lambooy, 2002; Feser & Bergman, 2002). The repeated interactions and informal contracts stimulate trust and open communication, reducing the costs of controlling and recombining market relationships (Floysand & Jakobsen, 2002; Porter, 1998c).
Furthermore, the concentrations would have the potential to increase productivity and the rate of innovation of the firms located within their borders, thus leading to self expansion and strength (Porter, 1998a). Greater flexibility of products and processes and a larger reputation would be other potential benefits of locating within industrial concentrations (Corolleur & Courlet, 2003; Molina-Morales & Martinez-Fernandez, 2003; Pietrobelli & Barrera, 2002).
Location, therefore, is recognized as a factor that directly affects the competitive advantage of firms (Porter, 1998c), and industrial concentrations, in this context, would provide superior performance to their firms (Boasson et al., 2005).
Concentrated Firms and the Conversion of Assets into Profit
The importance given to the issue of location seems to justify the increasing geographic concentration of firms, as well as the accumulation of empirical evidence demonstrating the influence of geography on the results of firms, positioning itself as a key factor in defining the boundaries of the competitive landscape (Arikan, 2009).
The term competitiveness has been used in a general way to refer to the performance of firms. Therefore, at the firm level, competitiveness has a relatively clear meaning, referring to the ability of a company to compete, grow and be profitable in the market in which it operates (Bristow, 2005).
In studies on the composition of the performance variance of firms, the Return on Assets [ROA] and Operational Return on Assets [OpROA] are among the most common indicators of profitability (Mcgahan & Porter, 1997; Rumelt, 1991). The rate of Return on Assets [ROA] measures the overall efficiency of the company in generating profit from its available assets (Gitman, 2001). It can be interpreted in two ways. First, ROA measures the firm's...
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