Economists and geographers have looked at the role of scale economies in shaping industries and also in the the clustering or agglomeration of economic activity. Princeton University economist William Baumol identified the role of economies of scope – for example, when large companies leverage shared research and development or marketing capabilities across their product lines or even used the same assembly lines to make different products. The theory of scope economies has been influential in economics and business studies but has not really been applied or discussed in economic geography or regional terms.
A new study with my Martin Prosperity Institute colleagues Charlotta Mellander and Kevin Stolarick explores the role economies of scope in shaping geographic outcomes, advancing a concept we call geographies of scope. Here’s the abstract:
The geographic clustering of economic activity has long been understood in terms of economies of scale across space. This paper introduces the construct of geographies of scope. We distinguish between geographies of scope and the more commonly understood notions of economic diversity or geographic spillovers. Following research by Baumol and others (e.g. Baumol et al.., 1982) who define economies of scope as the efficiencies gained from sharing common inputs (from leveraging R&D or marketing departments across products to producing two products on a single assembly line), we argue that geographic economies of scope are driven by substantial, large-scale geographic concentrations of related skills, inputs and capabilities. We examine this through an empirical analysis of the entertainment industry across U.S. metropolitan areas from 1970-2000. We use a variety of statistical techniques to probe for the effects of collocation of key related entertainment segments while controlling for the effects of scale or region size. The findings of our regression analysis indicate that geographies of scope (or collocation among key related entertainment subsectors and inputs) explain more of the economic geography of entertainment than does our scale variable (population size), though our regressions over time suggest the role of scope is decreasing. Furthermore, we find that the entertainment sector as a whole and its key subsectors are significantly concentrated in two superstar cities – New York and Los Angeles – far beyond what their population size (or scale effects) can account for, while the pattern falls off dramatically for other large regions. Thus we find that scale economies are a necessary but insufficient factor for explaining the economic geography of entertainment: The rest of the explanation comes from scope economies – that is, the large-scale concentrations of related skills, inputs and capacities in geographic space.
The full paper is here.