Question

What is meant by "a cluster of firms" and what are the three main sources of the economic advantages derived from locating in such a district?

Answer 1

When interconnected firms from the same industry set up thier plants in proximity in order to take advantage of their intermediate inputs which cuts down their production costs leading to the formation of "a cluster of firms". Generally firms dealing with a particular product prefer to concentrate together geographically where they they can get the opportunity of sharing their labour pool, technology, information and suppliers which reduces their production costs.

The three main sources of economic advantages derived from locating in such a district are as follows-

1) Sharing labour pool:- several producers engaged in the same production system cluster in an area where labours are available easily. As production of a firm varies with the demand and supply of the products, it needs to maintain the labour strength accordingly. When the product in the market has higher demand, the production also goes up which require more labour at that time. On the time of recession, the firm needs to cut down its labour strength. So location of a firm really matters as hiring and firing of labours are imperative parts of a firm and it would prefer to keep its production costs low by without paying higher wage while hiring and compensation while firing labours. So firms might cluster in an area where labours are found easily and can share labours from each other in times of requirement.

2) Proximity to suppliers:- When firms concentate in an area close to their suppliers or customers, firms get benefit from the low cost of transporting finished goods to the market and the location gurantees timely delivery and low inventory cost.

3) Availability of infrastructure and technology:- When several firms cluster together in an area, they get the advantage of sharing their technology and infrastructure among themselves which reduces their cost of production. Besides they get the opportunity to exchange ideas and information which help to enhance their production capacity and benefits.