Agglomeration economies

Topic: Secondary Activities: Manufacturing and Industrial Location · NCERT: Class 12, Ch 5 "Secondary Activities"

Meaning

Agglomeration economies are the cost savings that factories get when they set up close to a leader industry and to other related firms, because they can share links, suppliers, workers and services. They explain why industries gather in the same places to form industrial regions, and why these regions keep growing long after the first reason for them has faded.

Explanation

How the savings arise (cause → process → result)

• Cause: a leader industry sets up in a place.
• A big or early industry settles somewhere for a basic reason, such as raw material, coal, a river or a port.

• Other firms that sell to it, or buy from it, move in nearby.

• Process: four kinds of shared benefit build up.

• Linkages: one firm's output is another firm's input.
  • The goods travel only a short distance.
  • Transport costs fall, and so do delays.
• Shared suppliers: many firms buy parts, machines and repair work from the same local suppliers. So the suppliers stay close by and can serve them all.
• Skilled labour pool: trained workers already live in the area. A new firm can hire them without training them from the start.

• Shared services: banking, insurance, transport and marketing grow up to serve all the firms. Each firm pays less than it would if it were on its own.

• Result: the cluster attracts more firms.

• New firms keep joining the old centres.
• So industrial regions persist, even after the first cause (for example a coalfield) has lost its importance.

Its place among the location factors

• NCERT lists seven factors for large-scale industries: access to market, access to raw material, labour supply, sources of energy, transport and communication, government policy, and agglomeration economies.
• The basic rule of industrial location (the place where a factory is set up) is to keep total cost as low as possible, so that profit is as high as possible.

• Agglomeration lowers total cost by sharing costs among many firms. It does not depend on any single input.

• The factors act together. Agglomeration usually adds to the first pull of a place, such as raw material or transport. It does not replace it.

Industrial districts and clusters

• Beyond NCERT: Alfred Marshall's "industrial districts" are places where many small, specialised firms in one trade cluster together. They share skills and know-how.
• An Indian cluster works the same way. Many small units in one product share workers, suppliers and buyers.
• This matters most for labour-intensive work (work that needs many workers), such as knitwear, hosiery and brassware.

Conditions it needs

• A leader industry, or a core of firms, that came first.
• Related firms whose inputs and outputs connect to one another.
• Good transport and communication, so that the linked firms and services can work as one system.
• A steady supply of skilled workers who stay in the region.

Where it occurs

• India: product clusters
• Tiruppur (Tamil Nadu): cotton knitwear.
• Ludhiana (Punjab): hosiery and woollens.

• Moradabad (Uttar Pradesh): brassware.

  • It has a sector-specific handicrafts SEZ. The UP Government set it up in 2003, and it has been working since April 2007. It had 58 operational units as on 30 June 2021 [2].

• India: river and port belts

• Hugli jute belt (West Bengal): the Hugli is a distributary of the Ganga that flows past Kolkata into the Bay of Bengal.
  • Several things were close together: jute from the Ganga–Brahmaputra delta, cheap water transport, the port of Kolkata, coal from Raniganj and workers.
  • Because of this, a belt of mills grew on both banks of the river.

• Port towns such as Mumbai, Kandla, Visakhapatnam and Chennai draw related industries, such as refineries, fertiliser plants and shipbuilding.

• World: old industrial regions that persist

• The Ruhr (Germany), the British Midlands and Pittsburgh (USA) first grew on coalfields during the Industrial Revolution.
• Western Europe and eastern North America built dense railway, canal and road networks early. This helped industry gather there.

Don't confuse with

• Raw-material orientation: a factory sits near the source of a weight-losing input (one that loses much of its weight during processing, such as iron ore, sugarcane or limestone). Agglomeration pulls a firm towards other firms, not towards a raw material.
• Government policy (regional policy): here the state uses incentives, such as SEZs, corridor cities or backward-area subsidies, to place industry in a region, sometimes against pure cost logic. Agglomeration savings grow by themselves from firms being close together. Policy can only help a cluster form.
• Regional specialisation: a region makes what it is best at and trades for the rest. This grows from cheap transport. Agglomeration is about the cost savings from closeness that keep firms together in that region.
• Footloose industries: these are not tied to any one raw material and can locate in many places. Agglomeration describes the pull of existing clusters, which often decides where such free-to-move firms finally settle.

Prelims Hooks

• Agglomeration economies are one of the seven location factors for large-scale industries listed in NCERT Class 12, Ch 5.
• Cluster–product pairs: Tiruppur–cotton knitwear, Ludhiana–hosiery and woollens, Moradabad–brassware.
• Moradabad handicrafts SEZ: set up in 2003 by the UP Government, working since April 2007, with 58 operational units as on 30 June 2021 [2].
• "Industrial districts", meaning clusters of small specialised firms in one trade, is an idea from Alfred Marshall.
• Agglomeration savings come from linkages, shared suppliers, a skilled labour pool and shared services. Trap: a tax break given by the government is policy, not an agglomeration economy.
• Agglomeration explains why industrial regions like the Ruhr and Pittsburgh persist after their coal advantage has faded.

Mains Points

• Why old industrial regions survive. Coal-based regions such as the Ruhr and the British Midlands grew on coalfields. Later, hydroelectricity and petroleum freed industry from coal. Even so, linkages, skilled workers and shared services kept new firms coming. Today, market access, transport and agglomeration matter more than raw material in deciding where industry goes.
• Clusters and MSME exports (GS-I/GS-III). Tiruppur, Ludhiana and Moradabad show how shared labour, suppliers and services keep small firms competitive.

• Cluster policy is a cheap way to boost exports. It works through common facilities and sector-specific SEZs, such as the one at Moradabad [2].

• Growth centres need linkages, not only incentives. SEZs [2] and NICDP corridor cities [3] try to create new industrial regions through infrastructure.

• Success depends on whether linked firms actually cluster together. Only 268 of 376 notified SEZs were operational in 2021 [2].
• Tax breaks alone do not create agglomeration economies.

Related concepts

• Industrial location
• Access to market
• Weight-losing raw material
• Access to sources of energy
• Regional policy

Read more

• Why industries locate where they do: the location factors