Agglomeration economies

Indian Economy glossary

Also called: Economies of agglomeration · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Beyond NCERT

Meaning

Agglomeration economies are the gains firms get by locating close to one another, especially firms in the same or linked industries. Being together lowers costs and raises productivity. Economist Alfred Marshall named three sources:

  • labour pooling: skilled workers are easy to find;
  • shared inputs: suppliers, repair shops and transport are close by;
  • knowledge spillovers: ideas and skills spread quickly between firms.

These gains explain why industrial clusters form. They are also why governments support clusters to help small firms compete.

Example

In Tiruppur (Tamil Nadu), hundreds of knitwear units sit together with dyeing units, yarn traders and exporters. A small firm there can find trained workers and cheap inputs, and pick up new designs quickly. The same firm standing alone would struggle. Schemes such as MSE-CDP and SFURTI support clusters like this.

Don't confuse with

  • Economies of scale: Economies of scale lower costs because one firm grows bigger. Agglomeration economies lower costs because many firms locate near each other, even if each stays small.

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