Factors undergirding the decline of economic clusters
Having the throne doesn't make your firm impregnable. One of my lines is that once McDonalds made it to the top of the fast food restaurant industry, they were always going to lose market share as the segment was vulnerable to niche operators and new business models.
Agglomeration economics. Business clustering, or agglomeration economies, occurs because a firm develops in a place for particular circumstances--access to resources, capital, transportation efficiency, etc.--and as the economic segment develops, support businesses, financing, and other firms are created, strengthening the place as the center of that industry.
But over time, other places compete for pieces of that industry, diminishing the strengthen and preeminence of the original cluster. This is abetted by how older firms have higher costs, such as pensions and wages, because of a more mature workforce, etc.
There are a couple of good articles about this.
Washington, DC as a center for business around government. One is in Greater Greater Washington, "DC has officially lost over 83,000 jobs. The reality is even worse," about Washington DC's economic decline, which results from three things: (1) work from home as a response to covid meant people left the city for cheaper places to live while retaining their high "in Washington DC" incomes, shrinking the local economy and the demand for housing; (2) federal government shrinkage; and (3) decline in international business and tourism.
This is abetted by what is called the multiplier effect, how each direct job supports indirect jobs either within that industry, or in consumption related jobs. So the 22,000 jobs cut by the federal government has a total effect of 66,000 to 88,000 lost jobs.
DC's competitive advantages. When I first got involved in revitalization 25 years ago, I identified what I believed were DC's primary competitive advantages.
These were, before covid and work from home, the city's competitive advantages. WRT the federal government, the city also has to contend with the disinvestment agenda of the Republican party, including relocation of agencies to other parts of the county.
- The steady employment engine of the federal government.
- Historic residential, commercial, and civic architecture
- Historicity (the nexus of people and place)
- Walking City Urban Design.
- Transit Network allowing for mobility without automobile dependence
Foremost was the steady employment engine of the federal government, even though long before the Trump Administration, other states and Congressmembers cherry picked agencies for their communities, like West Virginia at the behest of Senator Robert Byrd, a bunch of agencies are in Maryland, etc.
Wholesale dismantling of agencies and bureaus like the Agency for International Development or the Department of Education both reduce the capacity of government to perform--which supports the neoliberal principle that government is less effective than market-based solutions--and the employment advantages to DC.
Just as bad, both Trump Administrations have moved agencies out of the city as a stratagem to reduce government capacity and employment, in moves like placing the USDA Economic Research Service in Kansas City or BLM to Grand Junction, Colorado--a majority of the extant employees didn't move.
This is happening with the Forest Service division of USDA, which is consolidating, firing people, and moving its headquarters to Utah--a state at the center of fighting for the sale of public lands or their use for mining, oil production, etc., rather than for conservation.
The destruction of the US Agency for International Development wiped out the "international organization and contractor" economic cluster. Etc.
Hollywood: LA and film and television production. Los Angeles became the center of film production because it had a lot more sun than most places, which meant filming was rarely interrupted by negative weather. But even Greater LA couldn't "stand in" for all environments, which led to Vancouver, British Columbia becoming an alternative.
And like McDonald's, Hollywood, the King of media production, always was vulnerable to losing elements of its business environment. More and more places began offering tax incentives and other inducements that California didn't think it needed to provide. To the point where the loss of business was substantial and too far along to reverse.
The LA Times covers this in "How L.A. stopped being Hollywood’s leading star." From the article:
Film activity in the L.A. region plummeted in the second quarter of this year, with shoot days for feature films and TV productions falling 20% and 30%, respectively, compared with already anemic levels from a year ago, according to FilmLA.
The fallout has been devastating for local film crews and businesses. L.A.’s signature industry has shed some 57,000 jobs in the past four years, while more than 80 film and television production services businesses have closed since 2022. The production crisis has even become a political flashpoint alongside affordability, crime and homelessness in the race for mayor and governor.
The story of how L.A. steadily lost much of its homegrown industry to other locales is a tale of hubris, escalating costs, political inaction and fierce competition from states and countries hungry for a piece of the Hollywood pie. California eventually adopted a very limited film tax credit plan in 2009, but even then production had already gone elsewhere.
Additional lessons: changes in production and technology are "earthquakes" in industry tradition that support industry shake up and relocation.
Emerging versus mature markets. There are many ways to look at how to assess vulnerability. One is the Alexander Gerschenkron thesis of "the economic advantages of backwardness." His point is that established economies have vast investments in maintaining legacy systems of production. While emerging economies can adopt the latest technologies without having to strand billions of dollars in previous investments.
The perfect example is China and electric cars. Its automobile industry was nascent and did focus on traditional technology at first. But as the new technologies of EVs were developed, just on the basis of the size of its market, it was well positioned to be a first mover in the field. This was probably furthered because China isn't a large oil producer and therefore centering its car industry on alternatives to the internal combustion engine had other benefits of reducing demand and dependence on oil for transportation.
New technologies within industries. This is an issue within industries as well. The US automobile industry is a good example as the development of electric cars has allowed new entrants, although Tesla is the only real successful firm in the car market. The truck sector, the most profitable for the old Big 3, faces competition from new entrants like Rivian. But even so, because the US automobile market is so mature, with demand for "only" a few million vehicles per year, it can't compete with China.
Film and video is another example. Not only was Hollywood vulnerable to other states angling for a piece of the production pie, but as the industry atomized and vastly expanded from four main broadcast channels to hundreds, and then from centralized to decentralized distribution such as through streaming via the Internet IT infrastructure.
Now the big companies are all Internet based--Netflix, based in the SF Bay as is Apple, and Amazon, using its Prime platform as a media delivery system, is based in Seattle. The traditional firms keep merging, and none seems to have the heft to make video streaming content profitable, unlike Netflix.
Centralized versus decentralized distribution. This repeats from above. Video media is a primary example. But its enabled by the Internet and its massive "back of the house" information technology infrastructure.
It's comparable to the difference between "big iron" more centralized computing as typified by Boston and Route 128 businesses like Data General versus the microcomputer oriented Silicon Valley. This is discussed by AnnaLee Saxenian in Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (review).
Which has also spawned "cloud computing," although the foundations of such systems, starting with ADP payroll processing, are quite old. Amazon and Microsoft make a majority of their profits from cloud computing services--which is also driving the demand for data centers.
The Internet as a platform has similarly made direct distribution, complemented by extensive package delivery systems, much cheaper than before, allowing companies to sell products directly to customers with minimal transaction costs.
Previously, wholesale and large scale retail stores were the primary distribution points for goods, because this minimized transaction costs for the producer and the customer.
Electricity is now proving vulnerable to decentralized delivery through the adoption of solar energy systems and distributed energy resources (batteries) at the point of individual households and businesses ("Are plug-in DERs going to spark a grid revolution?," Volts).
New versus old companies and legacy cost structures. New companies have the advantage of small workforces earning less money and benefits than established companies.
High fixed costs, e.g., for the automobile industry pensions and insurance for current and retired workers, make it harder to take risks.
Marketing's Five Ps: Product, Price, Place, Promotion, and People. There's a maxim in business: your choice of price, quality, or speed of delivery, pick any two. The 5 Ps are the shorthand for how products have been developed and promoted. Changes in the conditions of any of those Ps provide a space for business opportunities to develop, threatening existing agglomeration economies of various business segments.
Source: Corporate Finance Institute.
For example, place means where a product is sold, but also how it gets there. Cheap gas and the highway network trumped railroads. Before railroads, many industries developed across the country, such as stove production, because the cost of transporting heavy items was so high.
Promotion no longer means the newspaper or broadcast television, but all sorts of digital media. This has made Facebook and Google the largest sellers of advertising, supplanting traditional firms. And social media--yes there are paid influencers--mean businesses and products can get great exposure without payment of any kind.
Labels: agglomeration economies, business models and operations, creative economy-creative industries, economic development, economic development planning, urban economics




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