Spatial Location of Firms and Industries: An Overview of Theory

Where economic activity will locate in the future is one of the most important and challenging questions in economics. Even though advances in technology have reduced the cost of transport and communication which has curtailed the ‘distance penalty’ for business operations, local proximity of firms that produce similar, competing and/or related products still matters. This reinforces the absolute, rather than relative, advantages of many small areas. The location of firms depends not only on costs of production and marketing, but also on economies of scale, activity-specific backward and forward linkages (indivisible production), accumulated knowledge, path dependence, innovation, the existence of sophisticated customers (markets) and on unpredictable chance events and historical accidents. ‘Global’ competitiveness often depends on highly concentrated ‘local’ knowledge; capabilities and common tacit codes of behaviour which can be found in spatially concentrated firms (clusters). Although there are certain principles for the location of firms, the issue is still complex and subject to further theoretical and empirical analysis.