External economies of scale are normally grouped into two groups – urbanization and localization. These refer to locating in a ‘larger city rather than a small one’ and ‘locating among a concentration of firms in the same and related industries’ respectively. For example, urbanization has many benefits including better access to more varied, dependable and cheaper transportation and better access to larger skill pools. Nevertheless, larger cities can also lead to diseconomies of scale in the form of congestion and crime. However, in general, it is a good idea to locate in a larger city due to the more diversified cultures and larger population allowing for higher demand. The more people around, the more likely you are to find customers for your...
External economies of scale are normally grouped into two groups – urbanization and localization. These refer to locating in a ‘larger city rather than a small one’ and ‘locating among a concentration of firms in the same and related industries’ respectively.
For example, urbanization has many benefits including better access to more varied, dependable and cheaper transportation and better access to larger skill pools. Nevertheless, larger cities can also lead to diseconomies of scale in the form of congestion and crime. However, in general, it is a good idea to locate in a larger city due to the more diversified cultures and larger population allowing for higher demand. The more people around, the more likely you are to find customers for your product along with highly skilled workers. While diseconomies may exist, the positives tend to outweigh the negatives regarding easier access to things which may prove essential to the survival of the firm as a whole such as demand.
The main example of localization that might exist at the time of writing is Silicon Valley in Santa Clara County, USA. It is primarily made up of electronic firms such as IBM, ITT, and Hewlett Packard. Through intense competition between all firms, it is constantly forcing innovation in the electronic industry which is a major benefit for society as a whole as everyone will benefit from an increase in more efficient, advanced technology. It also provides many employment opportunities and is where a large number of Stanford graduates cluster, so the skill pool of workers is especially high. The closeness of all these firms also allows for a decrease in the costs of production through the reduction of transportation and processing costs of similar functions. Also, localized economies can also be associated with non-tangible characteristics such as:
- An established reputation for products
- A highly skilled labor pool
- The ability to share information on markets
Although, while this may all seem like a wonderful idea, the closeness of the firms can sometimes lead to very intense competition, bordering on illegal, through processes like pricing strategies.
In conclusion, depending on the type of business, the most reliable location to set up it would be an urbanized, large city, especially if operating within the mass market.
