Agglomeration effects and global value chains

Agglomeration effects and global value chains

global value chains

Despite globalisation of (supply chains and sales), many industries

tend to be concentrated in certain places or locales, suggesting

that there are economic benefits from firms being located in close

proximity to one another. The concentration of computer-related

activities in California’s Silicon Valley is one example, but the

phenomenon is not new. The textiles sector has been clustered

around the same areas of Italy for centuries, for instance.

Under certain economic conditions, geographic concentration

increases the productivity of all the firms located in a particular

place and it makes their total output larger than if each one had

been operating in a different region. These “agglomeration effects”

occur because workers, and thus their skills and knowledge,

move between sectors and geographical regions and because one

manufacturing firm can use components supplied by a neighbour

(“intermediate inputs”) in its own production. Likewise, services

can be provided more efficiently to firms that are near each other.

There are also a number of benefits that are hard to quantify but no

less real, such as the informal networks of researchers and other

specialists that emerge from social contact.