Question

Which one of the following factors most dominants in the localisation of high-tech firms of silicon valley in California ?
1. Cheap Labour
2. Access to the market
3. High speed transportation
4. Agglomeration economy

Answer 1

Correct Answer - Option 4 : Agglomeration economy

• Agglomeration economies are the benefits that come when firms and people locate near one another together in cities and industrial clusters.
• These benefits all ultimately come from transport costs savings: the only real difference between a nearby firm and one across the continent is that it is easier to connect with a neighbor. Of course, transportation costs must be interpreted broadly, and they include the difficulties in exchanging goods, people, and ideas. The connection between agglomeration economies and transport costs would seem to suggest that agglomerations should become less important, as transportation and communication costs have fallen. Yet, a central paradox of our time is that in cities, industrial agglomerations remain remarkably vital, despite ever easier movement of goods and knowledge across space
• In particular, the agglomeration economy case for policies like Crossrail that enhance larger cities often rests on the existence of nonlinearities, such that agglomeration economies get stronger as cities grow. Despite the century or so of research on agglomeration economies, we are still far from having reliable estimates of such nonlinearities.
• Understanding agglomeration economies requires us to move beyond measuring the overall extent of agglomeration as revealed by housing prices, productivity, and population concentration. We must also understand the exact mechanisms that make it more productive to cluster. While all agglomeration economies can be understood as consequences of reduced transport costs, the nature of the agglomeration economy will depend on what transport costs are being reduced.
• For example, the classic Krugman (1991) model of agglomeration emphasized agglomeration benefits that come from reducing the costs of moving goods over space. When an input supplier locates next to a final goods producer, these fi rms become more productive by saving the costs of shipping the input.