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From: J Sager
Date: 2009/2/11
Dear List:
I wonder if anyone would know of a source or two that might buttress the following claim, extracted from an unpublished report:
"There is in Vietnam a tendency to “cluster” among providers of goods and services. Whole streets, neighborhoods, and villages dedicated to one special product attest to this--as do numerous anecdotes which recount market swings as everyone in a locality jumps into production of one recently lucrative product, thereby crashing the market, with the exception of a provider or two who tries a different product, which succeeds, thus causing a rush to produce it, a crash, and so on."
Thanks as well for any related studies, refutations, or learned musings.
Yours,
Jalel Sager
Vietnam Green Building Council
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From: DiGregorio, Michael
Date: 2009/2/11
The first reference is Pierre Gourou who described this in great detail in 1938 under a section of Peasants of the Tonkin Delta titled "village industries". Economically, clustering makes great sense. Four things take place in these clusters, whether in the city or villages. First, there is an early mover effect that allows the first into a market to earn higher returns than those who follow. The higher returns are then plowed back into production allowing for improved technology or range of products. Second, as the whole village or street embarks on this endeavor, some division of production is likely to occur that requires quick transactions between households. This creates external economies of scale within the value chain, further lowering costs. At some point, the cluster begins to crowd a market at a price that makes it difficult for new producers or traders from outside the cluster to enter. Third, the cluster also becomes the site of a particular savior faire that extends from sources of materials to markets. This adds to its reputation (there are lots of traditional ditties in Vietnamese about places to buy things). But equally, for consumers, there is another aspect. This was described long ago described by Geertz as "a bazaar economy" in which search costs become key. One stop shopping in a cluster allow buyers to compare prices for a number of different products in one place, thus limiting search costs.
Michael DiGregorio
Program Officer for Media, Arts, Culture & Education
The Ford Foundation
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From: Matthew Steinglass
Date: 2009/2/11
Just to add: as economist Dani Rodrik points out, one reason for clustering is that later entrants get to free-ride on the market discovery performed by early experimenters. In effect the experimenters and early adopters are not realizing the full benefits of the work they perform for society, since those who jump on their bandwagon later get to take away much of the market share. Rodrik believes this is a significant disincentive to experimentation in developing economies, and it seems to fit what happens in Vietnam very well.
Rodrik's blog has some interesting material on this.
Matt Steinglass
Correspondent, Deutsche Presse-Agentur
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From: DiGregorio, Michael
Date: 2009/2/11
I would disagree rather strongly. The lowered transaction costs and market effects of clustering make it possible for smaller business to compete against larger corporations that can invest much greater amounts of money developing internal economies of scale, and bear longer term debt.
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From: Matthew Steinglass
Date: 2009/2/11
I think Rodrik's point is mainly that people trying to stimulate growth in developing economies should consider ways to subsidize experimenters, because the economy may not be generating as much experimentation with new business ideas as is optimal. I don't think he's saying clustering as such is a bad thing.
Matt
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From: DiGregorio, Michael
Date: 2009/2/11
Matt.
Take a look at my dissertation. I conducted detailed research in three village industries, and wrote 400 or so pages on one. In each of these villages internal competition pushed (and continues to push) people to innovate. I can show you a timeline of these innovations someday, if you want. Rodrik approaches these questions of innovation on an individual firm basis, and I think that's where he fails. The cluster creates positive externalities beyond the level of the firm.
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From: Paul Brown
Date: 2009/2/11
To bring Mike's point to a highly illustrative case study, look at the city of Wenzhou in Zhejiang province. A very industrious early mover broke down a lighter, a gift from a visiting friend, into component parts to see how it was made, in the mid-1980s. By 1990, more than 3000 small businesses were making lighters in the city. Eventually, throught self-organization, the enterprise broke itself into functional and lighter component sub-clusters of the market. Low overhead, low friction administration between the self-organizing (eventually wittled down to about 700 firms), and marginal innovation, by 2003, Wenzhou controls 70% of the world lighter market.
For reference, see The Five Literacies of Global Leadership by Richard Hames.
Paul J. Brown
(For full disclosure, I have been a fan of Dani Rodrik's work for some time as well!)
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From: Adam Fforde
Date: 2009/2/12
For any of these effects to be though of as part of some equilibrium, there have logically to be offsetting factors … which I understand most the theories address. Thus theoretically positive externalities must theoretically be able to be offset, more or less, by negative externalities. This would suggest one reason why things appear to vary so much. Further, since externalities - like all aspects of market failure - are extremely hard to measure, since they are not by definition measured by any visible market price - though they are easy to discuss - that can also explain why people are so certain yet differ in their views so much. Economists' treatment of information asymmetries is a good example. On various reasonable definitions of the nature of business transactions between humans all transactions would be characterised by information asymmetry so, in neoclassical economic theory, all market transactions contain elements of market failure. In that case, any 'optimal' state is non-observable.
Vo vi.
Adam
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From: DiGregorio, Michael
Date: 2009/2/12
Adam,
As one of my economics professors reminded me, nobody makes money from equilibrium. Its the asymmetries that matter.
My observations of Lang Nghe in the 1990s suggested that steady states of low labor productivity, and lack of innovation come at the end of a cycle when prices for goods fall to an equilibrium that results in low, stable, but reliable incomes within a diversified household economy. Of course, this assumes that the village has agricultural land. Those without have no choice than to be driven to innovate by their stomachs, hence the Bat Trang's of the world.
Externalities like transaction costs are very difficult to calculate. But this one in particular is not impossible to roughly estimate since the ministry of finance has given us a ready tool in the cost of red receipts. In one village, I watched as the VAT system was implemented with a bit of local ingenuity intended to reduce transaction costs: they calculated an average profit per weight of material, then figured the tax, then imposed this through weigh stations for trucks exiting the village.
In my own research, I relied a lot on Alfred Marshal's observations of internal and external scale economies.
Mike
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From: Jim Cobbe
Date: 2009/2/12
I come to this thread late, and my apologies if somebody already said this or it is totally irrelevant. It is not only that standard theoretical equilibrium involves no "economic profit," only "normal return to factors"; perhaps more to the point, I know of no reason whatsoever to believe that any real world economy of any size or complexity ever is in equilibrium; conditions change, people do new things, some die, others are born, the world is in constant change. So real world economies are in transition toward the new theoretical equilibrium, if nothing changed. But of course, something changes, so the target changes. Unfortunately, academic economics has very little comprehensible to say about the mechanics and dynamics of the transition process, except that it is driven by arbitrage. One can, in broad terms, make the case that the export-led growth strategies of the last twenty years are exploiting the obvious disequilibria between long-run production costs in different countries; that the prominence of overseas Chinese in business in SE Asia reflects lower information and transaction costs that better permit them to exploit arbitrage possibiliites; and the role of Viet Khieu in various new urban activities similarly results from such advantages in spotting arbitrage opportunities, including in that the introduction of "new" products and services and production techniques that have as their starting point existing activities in their overseas new homes. Maybe off the point, but that word 'asymmetries' set me off -- what did you mean? Jim
DiGregorio, Michael wrote:
--
Jim Cobbe
Professor,
Department of Economics
Florida State University
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