However, firms and jobs to move elsewhere.

However, if these conditions cited
above were enough to make industries move elsewhere, then all the cities would
deagglomerate at some point, and there would be no agglomeration centers
anymore. However, our world is becoming increasingly urbanized: the UN (2014) recently
stated that by 2050 more than 66% of the world population is expected to live
in cities. The answer is that only a type of industry is able to deagglomerate.

For the spreading out of an industry, there needs to be industry-specific
conditions, for firms and jobs to move elsewhere. Industries that are able to
move are industries that have clear previsions for the future, stable supply
and demand, and who do not require highly-complex innovation in their
production process. Moreover, these industries have settled enough in an area
to build trust with their network, which means that they do not need to be
physically close to their clients in order to be productive.  

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For example, the steel industry is one
capable of deagglomerating, thanks to its structure and repetitive production
process. Indeed, the market is stable, big and certain. The companies can plan
their production volume way ahead and do not need to shortly adjust their production
size. The products are not involved in any type of radical innovation, and the
products are produced in high quantities. Hence, these companies are able to negotiate
very specific deals allowing them to obtain vast transportation discounts. This
phenomenon has also been strongly reinforced these days with the severe fall in
transportation costs brought by globalization (Audretsch et al, 2008). Indeed,
the OECD (2005) explains in one of its publications that the cost of aircraft transportation
has been reduced by four in the past fifty years. Consequently, it becomes
possible for those types of industries to de-agglomerate and benefit from lower
costs of land and labour in developed countries.

On the other
hand, some industries do not have the possibility to both deagglomerate and be
productive. For factor-specific industries like a button maker for the fashion
industry, the need for proximity often overrides the motivation to seek for cheap
labor and land (O’Sullivan, 1990). Indeed, a button for the fashion industry is
not standardized, hence will require very specific needs that need face
interactions to understand the need of the client. A button maker will be
involved in a lot of modification costs that will not allow him to be located
far away from dress makers. Indeed, once a dressmaker buys a button, the
dressmaker may incur a cost to modify the button to make a perfect match. For
example, the dressmaker might need to shave the edges of a button and make it
hexagon. The button maker therefore has a higher demand due to cluster
of fashion dressmakers, and it is said that the price of one button could drop
from 0.5 dollars to 0.25 dollars when firms are clustered (O’Sullivan, 1990).

Therefore, industries that are characterized by constant innovation of
products, uncertainty, clients with specific needs, will be dependent on the agglomeration.

 

Finally, another key factor to
determine whether the industry can agglomerate is to look at the product cycle.

In 1930s Kuznets and Burns concluded that individual industries tended to pass
through a regular developmental cycle (Norton and Rees, 1979). Each
product has a cycle, within which each phase has a specific geography that is
linked to the maturity of the product. Indeed, at the early and late
introduction phase, the product imperatively needs to be formed in clusters.

The cluster provides more rapid growth. After, once the product has reached
maturity, de-agglomeration can become possible, if the product also matches
with the previous industry-specific criteria discussed above. When the
production has become routinized enough and no innovation occurs anymore, it
does not make economic sense for the factory to remain in a city with high
rents and a stagnating market. Hence, the maturity phase of the product cycle is
accompanied by firms closure and corresponds to employment loss. (Audretsch et
al., 2008). 

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