Caution to place makers: Greater firm density does not always promote incumbent firm health
William Kerr, Oliver Falck, Christina Günther, Stephan Heblich 11 February 2013
Governments around the world are fostering industrial ‘clusters’, hoping to create agglomeration economies. Using the political division of Germany in 1949, this column argues that heightened firm density can raise costs for incumbent firms in addition to the often-cited agglomeration benefits. This is important for policymakers contemplating efforts to promote their local areas by targeted cluster initiatives and bidding to attract large firms. Policy efforts that are neutral in orientation – such as physical infrastructure investments or improving the generation and dissemination of knowledge – may be more effective alternatives.
A common theme in economic geography is that increasing returns to scale at the local level are essential for explaining the geographical distribution of economic activity. These agglomerative forces are often cited as a rationale for policy intervention to attract new firms to areas. Tight geographic concentration, however, can also raise countervailing costs as firms compete for local inputs. This makes the gains from increased spatial concentration around incumbent firms uncertain.
Germany, clusters, agglomeration, East Germany
Hans-Werner Sinn, Gerlinde Sinn 09 November 2009
Twenty years after the fall of the Berlin wall, Germany’s political unification has succeeded. This column argues that its economic unification has not – East German growth has been very disappointing and pulled down the economy as a whole. It blames policies that raised East German wages above market levels.
Germany’s political unification has succeeded; its economic unification has not. Twenty years after the fall of the Berlin wall, GDP per capita in the formerly communist area is 69% of that of the former Federal Republic of Germany including West Berlin. This value sounds better than it is, as it is artificially inflated by civil servants’ wages and salaries, which have reached West German levels. East Germany’s privately produced GDP per capita is only about 66% of the West German level.
Europe's nations and regions
Germany, unification, East Germany, wage fixing