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These industrial agglomerations may arise for a variety of idiosyncratic reasons (Myrdal 1957; Arthur 1990; Krugman 1991). But why do they persist over such long periods of time? From an evolutionary perspective, two processes could sustain these agglomerations. On the one hand, organizations in concentrated regions might perform better—and hence survive longer—than those located in sparse areas. On the other hand, new production facilities might simply open more frequently in the vicinity of industrial agglomerations. In other words, both lower failure rates and higher founding rates can sustain geographic concentration, though different forces might drive each of these processes.
Economic explanations of industrial agglomeration explicitly emphasize better performance, and implicitly lower failure rates, as the key process underlying the continuing geographic concentration of production. Theorists suggest that organizations benefit economically by locating in efficient positions. Several factors can make a location economically advantageous. In some cases, organizations benefit by minimizing the transportation costs for inputs, such as when scarce raw material, cheap factors of production, or unique skills can be obtained locally (Weber [1909] 1928). Alternatively, organizations may locate near consumers to better serve these constituents (e.g., Smithies 1941). In other cases, the colocation of structurally equivalent organizations—those that operate in the same markets—itself yields advantages to these actors regardless of the particular location they choose. Several mechanisms can drive these “economies of agglomeration,” including an extended division of labor (Marshall 1922; Chinitz 1961), common labor markets (Krugman 1991 Rotemberg and Saloner 1990), and knowledge spillovers (Scherer 1984; Saxenian 1994). All these factors presumably enhance the performance and survival chances of firms in efficient locations.
Although these explanations seem plausible, they ignore the fact that structurally equivalent organizations also compete with each other for vital resources. To the extent that geography provides another dimension along which organizations can differentiate, colocation should increase the degree of structural equivalence—and competition—between organizations (Hawley 1950; Hannan and Freeman 1977; Burt 1992). The fact that organizational ecology studies support this expectation by showing that organizations apparently compete more intensely within local population boundaries (Carroll and Wade 1991; Hannan and Carroll 1992) provides a serious challenge to traditional theories of geographic concentration.
To resolve this conundrum, we suggest an alternative explanation for the persistence of geographic concentration in production that focuses on the structure of entrepreneurial opportunities as the force maintaining industrial agglomeration. Like other forms of economic action, entrepreneurial action occurs within a web of social relations that both enable and constrain activity (Granovetter 1985). We argue that dense local concentrations of structurally equivalent organizations increase the pool of potential entrepreneurs in a region, thereby increasing founding rates. Not all individuals have equal chances of becoming successful entrepreneurs. Rather, entrepreneurial action requires knowledge of the business (Liles 1974), ties to scarce resources (Stinchcombe 1965), and self confidence (Bandura 1986). Although some of this knowledge and these resources (e.g., financial capital) might enable any potential business venture, many of these factors apply only to a particular type of enterprise. Without prior experience in the industry, a potential entrepreneur will find it difficult to acquire this specific human and social capital. Thus, the current location of production structurally constrains access to these resources.
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