Regional Economics, Theories of local development (Diversified relational space) - Part 3

TERRITORIAL COMPETITIVENESS AND ENDOGENOUS DEVELOPMENT. AGGLOMERATION ECONOMIES.

8.1. The endogenous sources of competitiveness: agglomeration economies.

Until now space has performed two distinct roles in models and theories:

1. Role of physical barrier against economic activity. Taking the form of the physical distance between input and output markets, conceptualised by models as a generic transportation cost.
2. Role of physical container of development. A simple geographic area often associated with the administrative region by aggregate macroeconomic theories.

In both cases space plays no part in determining the development path of a local economy.

A radical change in the conceptualisation of space gives it a very different role in development. Space is now conceived as an economic resource, as an independent production factor.

It is the generator of static and dynamic advantages for firms and a key determinant of a local production system's competitiveness.

Space is a source of

increasing returns and positive externalities. These positive externalities take the form of agglomeration and localization economies. Higher growth rates are achieved in local production systems where increasing returns improve local productive efficiency, reduce production and transaction costs, enhance the efficiency of production factors, and increase innovative capacity. Regional development, therefore, depends on the efficiency of a concentrated territorial organization of production, rather than the availability of economic resources or their spatial allocation. Space is characterized by its diversity, where it is easy to distinguish the uneven distribution of activities, even within a region. Development occurs selectively in areas where the concentrated organization of production has positive effects on static and dynamic efficiency parameters. At the same time, space is relational, as economic and social relations that arise in an area contribute to its development.crucial functions in various respects. They ensure the smoother operation of market mechanisms, more efficient and less costly production processes, the accumulation of knowledge in the local market and a more rapid pace of innovation, all of which are factors that foster local development. Adopting this new notion of space it is no longer possible to treat development as exogenous in origin. Development is now ENDOGENOUS. It is fundamentally dependent on a concentrated organisation of territory, embedded in which is a socio-economic and cultural system whose components determine the success of the local economy: - entrepreneurial ability - local production factors (labour and capital) - relational skills of local actors generating cumulative knowledge acquisition - decision making capacity that enables local economic and social actors to guide the development process. Theories of local endogenous development divide into two broad strands: 1. Neo Marshallian inquiry, which view local growth as

resulting from externalities acting upon the static efficiency of firms, has been expanding and consolidating for years.

Neo-Schumpeterian literature, which has arisen more recently, interprets development as resulting from the impact of local externalities on the innovative capacity of firms.

The logical leap of interpreting space as an active factor in development forcefully imposed itself upon the history of economic thought in the early 1970s, when unprecedented patterns of local development in Italy surprised theorists by resisting explanation based on conventional model.

During the 1970s the sudden and rapid growth of Northeast and Centre regions in Italy, when the country's industrialised areas were showing evident signs of economic crisis could be explained neither by a neoclassical paradigm of interregional mobility of production factors, nor by a paradigm centre on large firm efficiency (Perroux) nor by a Keynesian paradigm of development driven by

external demand.The first systematic theory of endogenous development was produced in Italy by Giacomo Becattini with his seminalstudy on the “Marshallian industrial district” in the mid-1970s.

The theory of the industrial district (originated in the work of neoclassical economist Alfred Marshall) was the first toconceptualise external economies of agglomeration as sources of territorial competitiveness. The economic aspect ofdevelopment are reinforced by a socio-cultural system that fuels increasing returns and self-reinforcing mechanism ofdevelopment.

The theory of the optimal city size represent the first step to identify the urban size that allows the full exploitation ofurbanisation economies. Further reflections have associated urban efficiency increases not only with urban size, butwith an increase in the endowment of high quality urban production factors, high level functions, high quality servicesoffered, in a dynamic perspective.

8.2. The Marshallian industrial district

8.2.1.

The genetic conditions of an industrial district The 1970s witnessed the miracle of the "Third Italy" the northeastern and central regions of the country that recorded high growth rates in a period of general economic crisis provoked by severely adverse macroeconomic conditions (oil shocks, inflation, unemployment, stagnating consumption and investment, devaluation of the national currency (lira)). The third Italy development model was hailed as a new form of capitalist economic development. The distinctive features of which were close concentration of small-sized firms and a form of entrepreneurship that seemingly stemmed from the historical structure of local agricultural systems. These studies on success factors were flanked and enriched by surveys on the flexibility of local labour markets and by sociological analyses of cultural, social, political homogeneity that underpinned a long tradition of cooperation in agriculture and trade. The theory that derived from the empirical

The results of these studies was the “Marshallian industrial district”. This term denotes a local area with a strong concentration of small and medium-size firms, each specialized in one or a few phases of the production process (or subsidiary activities to it) serving the needs of the area’s principal sector.

The genetic conditions that must be in place for a geographical area to be an industrial district are:

1. Spatial proximity (or geographical contiguity among firms);
2. Social proximity (system of institutions, codes and rules shared by the entire community regulates the market). This system induces firms to cooperate and to resort to the local market when activities phases or services prove too costly for them to produce internally;
3. Concentration of small firms (the main features of which are productive flexibility and rapid adjustment to market volatility);
4. Marked industrial specialization of the area (all the production chain phases are undertaken: from the

designof the product, through production of all intermediate goods necessary for the product's manufacture, to its mar-keting world-wide. 13 di 288. 2.2. District economies District economies derive from the factors (Table 8.1) now described: 1. Lower production costs. The existence in districts of numerous and highly specialised local suppliers reduces the costs of transporting in-termediate goods. A local labour market with high level of elasticity also reduces production costs. 2. Reduced Transaction costs. The geographical proximity facilitates the matching of labour supply and demand through a close-knit local infor-mation network. Even more important is social proximity: the system of shared rules of behaviour, code of conductinternalised by socialisation and the sense of belonging to a community. Social proximity generates governance mechanism which discourage opportunism or dishonesty in transactions, itthus substantially reduces costs and recourse to the market. 3. Increased

efficiency of the production factors.External economies do not have positive effects on costs alone. Production resources remain equal, the system ofshared social values and the spatial concentration of specialised (small) fi rms act upon the production capacity offi rms to increase the effi ciency of the production factors.Social proximity engenders what Marshall called “industrial atmosphere” by which he meant an industrial cultureconsisting in the indivisible intangible assets of the production system as a whole making fi rms more productive:

• Entrepreneur mentality
• Spirit of cooperation
• Local technical knowledge (about the production cycle)
• Socialisation of knowledge

4. Increased dynamic efficiency.In the sense of innovative capacity possessed by fi rms operating in the district.The high level of collective efficiency achieved byfirms in industrial districts is therefore explainedby district economies. These theories conceive theterritory as the

1. Source of economic growth, that is a factor that contributes to determining the development of path and productive capacity.
2. Beyond district economies
1. There are some factors present in the economic and social context that generate and reinforce economic advantages of district economies.
2. Inextricable interweaving of economic, geographical and social elements.
3. The strength of this organisational model is the close relationship between the economy and the social structure. In this sense, analysts have formulated the notion of "community market" because the information that transactions require resides both in the prices system and in an implicit code of behaviour that economic agents internalise through socialisation.
4. Integration between cooperation and competition.
5. Streaking an appropriate balance between these two processes determines the survival itself of the district organisational model. Competition is the driving force behind district firms obliged to

Maintain they goods at high-quality levels and to innovate their production techniques. Simultaneously, forms of explicit cooperation characterised a market regulated by social norms and sanctions that punish opportunistic behaviour. Reputation is an intangible asset that ensures a firm's survival in the market.

The presence of governance structure (local agents and institutions) that buttresses transaction regulation system ensure the efficient operation of the "community market" by explicitly supporting forms of competition and cooperation. In order the this competition does not degenerate into aggression damaging to firms, the district's industry associations impose price controls in the form of agreed and indicative tariffs, modifiable according to manufacturing process.

Some critical remarks.

Weaknesses in logical-conceptual structure of the district theory.

It places pronounced emphasis on endogenous aspect and ends entirely to ignore the exogenous.

ial context, the identification of strategic objectives, the definition of operational objectives, the identification of resources and the implementation of actions to achieve the objectives.