# The Industry choice

Bulba! bulba at bulba.com
Wed Jan 5 21:11:59 EST 2005

```On Wed, 5 Jan 2005 11:19:56 +0100, aleaxit at yahoo.com (Alex Martelli)
wrote:

>Say that the city has ten hat shops of the same quality.  One is in
>Piazza dell'Unita`, all the way to the Northern border of the city.  One
>is in Piazza Saragozza, all the way to the Southern border.  The other
>eight are in Piazza dell'Orologio, smack in the middle of downtown.
>Each shop offers hats taken from the same random distribution: we can
>say that a normal curve measuring the utility function for the customer
>(some function of price, quality, looks, fit, ...), with identical
>average and variance, represents the best hat available today from a
>given shop from the POV of a given customer.

>Say that a customer has one day to shop for their new hat, and the
>locations are too far apart for a customer to visit more than one
>location within that day.  If a customer chooses to visit the one
>southern shop, or the one northern shop, the customer expects to be
>presented with the choice of hat from said normal curve.  If the
>customer goes downtown, they expect a choice which overall lies along a
>DIFFERENT curve -- the best-of-eight samples from the normal curve.
>Sorry I can't model that analytically, but both intuitively and from any
>little simulation (easy to code in Python) you can see the customer's
>expectations are much better if they choose the location where they can
>do more comparison shopping!

Obviously. I completely agree with you that is how it works _in a
model_, if reality were similar to that model.

What I doubt is that _in practice_ simple costs associated with
physical distance are so overwhelming. Maybe they used to be
in the past. I keep asking: what exactly is the premium to customer
to go to that place? what is the cost?

Suppose in your example the customer has to get in the car
in order to get to the hat shop anyway. And when he gets to
that quarter of the city, he finds no parking place. And we
know that even highly paid people tend to spend seemingly
irrationally much time driving around in order to find the
free place because they find the thought of having to pay
little money to pay for parking so disgusting.

<snip good model>

>Note that I'm not saying there are no forces pushing against clustering:
>of course there are, varying by industry etc.  But they're easy to
>overstate.

True, true...

What I'm getting at is that "repelling forces" can also be easy to
understate and "pulling forces" can be easy to overstate.

>Consider the highly skilled worker who has a choice: they
>can stay in some crowded cluster, say Silicon Valley, and keep facing
>congestion, high rents, etc, for high salaries and great opportunities
>to keep hopping to the highest bidder; or, they can accept an offer at a
>lower salary in some more isolated area, say a minor cluster such as
>Austin, Tx, and get less congestion, cheaper housing, etc, although also
>less opportunity to keep enhancing their careers.

I personally know a developer who worked in Orange County, absolutely
loved the place and refused to leave for years even though it consumed
almost half of his wage in rent. Then, one day, when he called me
(we like to have long talks over the phone), he said "screw it,
I truly hate to leave, but I'm not going to suffer that rent anymore".

Now he claims that due to other factors California is going down
the drain and educated people and businesses escape that state.
Apparently some stronger "repelling force" has overcome the
pulling clustering forces.

>  Which kind of worker
>will tend to pick which of the two?  Somebody who thinks they may be
>past the peak of their career, and won't get many more lucrative offers
>in the future anywa, might be more tempted by (say) Austin, while
>somebody who's keenly competitive and on a sharp upwards path may keep
>braving the congestion for the (to them) attractive lures and challenges
>of Silicon Valley.

Not if the state has had rollling black-outs, which puts the
production on automated semiconductor line in danger, because
backup generators have not been designed to operate for such a
long black-out.

You see, I'm not disagreeing with you that your model applies
_where it applies_. I only disagree that it applies in face of
stronger forces. Now what kind of forces is dominant in
most frequent scenarios would have to be worked out in tedious
empirical research I think. Which I haven't done, because
learning some economics is just a hobby to me.

>Of course there are a zillion other factors, but in
>as much as we're talking about factors strictly related to clustering,
>this is the bias, and therefore (in an Akerlovian model) this is the
>message which tends to be sent by such choices.

This I agree with.

<snip>
>But there are other transaction costs, mostly connected to the need for
>face-to-face interaction as being the most effective form.  I've worked
>for a SW development firm which tried to coordinate development
>distributed across many locations via cheap video-based teleconferences
>spanning timezones from California all the way to India; I've done way
>more than my share of telecommuting and airport- and plane-hopping for
>development projects geographically distributed and/or mostly located
>far from the customers and/or other stakeholders; I know whereof I
>speak...

Oh I do not mean smth so extreme.

<snip>
>I remember glancing at some costly booklet called something like "Poland
>Infrastructure Report" back when an employer was considering setting up
>a branch office somewhere in Poland (selling and customizing SW for the
>mechanical industry), and back then issues such as internet and other
>telecom access, easy availability of top graduates, ease for expatriates
>from Italy to live in the place for a while knowing only English and
>Italian, at most German and French, and not Polish or Russian, closeness
>to good international airports and other good transportation, closeness
>to partner firms and potential customers' decision-makers, all appeared
>to point to Warsaw, if I recall correctly.  Mechanical engineers with
>some programming experience or viceversa, good translators, and good
>salespeople with connections in the mechanical industry, are not as
>ultra-specialized as all that, after all.

Most sales offices in Warsaw do not employ esp. educated people in
my impression. OTOH, the carmaking facilities nowadays require
more much more know-how and specialized workforce than a sales
office does. Or at least that was my impression when I worked at
the construction machine manufacturer in Berlin.

Capital investments per worker in auto industries are reportedly
very high. Simple physical tasks are done largely by machines,
like this 100 million Deutschmark costing laser-cutting installation
that I've seen there, where a pile of iron bars is pulled in at one
end and the pile of ready components is spitted out of the other end
(unlike typical thermal cutting,  laser has the advantage of not
destroying the metal structure adjacent to the cut, so the parts
of the machines subject to high-stress are oft produced this way).

Oh, and by the way that installation doesn't get used much.
Somebody at the office didn't check carefully enough the
energy prices before ordering it and later someone discovered
that off-site specialized cutting firms that take advantage of
energy available at low prices at special times in other countries
can get it produced cheaper. Moving it elsewhere or selling
is not an option, since it is a specially constructed, low, 50-meters
long hall that stands inside the huge manufacturing hall of the
company.

100 million DM (when 1 DM was worth some half of Euro
back then) down the drain. When the company was in rather
bad financial situation (later I've learned it was finally bought
out by Americans). Oh well. No big deal.

I was utterly shocked. Having grown up in Soviet times I have
been used to seeing precious resources wasted by organizations
as if resources were growing on trees, but smth like this?! In a
shining ideal country of Germany?! Unthinkable.

>The firm I was working for had a consensus decision-making process (even
>I was involved) and managers (and other employees) and stockholders were
>mostly the same people -- it wasn't all that large a firm at the time.
>Nobody needed to practice risk avoidance.

Again, you may have had good luck. Where I worked (including
some places in Germany and UK) it was almost the only factor
that seemed to matter to people - they'd do ANYTHING not to
take a risky decision, to "pass the buck", not to stick their necks
out, not to declare doing some work that involved challenges.

Though maybe that is just my impression - such issues as
interpreting behavior of another human being are contrived
and tend to be heavily "filtered" in a subjective filters. Policemen
for instance place little value in witnesses of events, because
the testimonies tend to be made up of so much disinformation
and personal sentiments rather than perceiving what really
happened. If that happens re simple events, it is probably
much worse re interpretations of another person's motives.

>of Warsaw vs other locations loomed HUGELY large, judging of course from
>some consultants' reports purchased for the purpose --

I'd be skeptical of such reports - I don't know about situation from
the beginning of 1990s, where this partially may have been the
case; however, back then pretty much all of the country has had
lousy infrastructure, and today, many bigger cities have
comparatively good infrastructure.

Workers - here's the difference. Warsaw has been a big "vacuum
cleaner" for talented people from all over the country. This
may have been a factor.

>it may look
>different to people living in the place, although I'd like to get a
>second opinion from Warsaw's Chamber of Commerce since you appear to
>have a very specific individual bone to pick (and I can sympathize: even
>though Milan may be the economically correct choice for foreign
>investors, I'd never want to LIVE there myself, being a Bolognese... but
>I must admit that Milan's infrastructure, connections, location, etc,
>etc, may in several cases drive a rational decision to set up there).

It's not so much individual as the fact that 80% of foreign
investments in this country (in terms of amounts of money
invested) are made in Warsaw. While Warsaw REALLY does
not have so much better infrastructure.

There's the same problem with Russia: similar fraction of
foreign investments take place in Moscow, which drives
real estate prices there to simply insane levels. Even
though other big cities, e.g. Saint-Petersburg has 4.5
million inhabitants and lots of educated people there, too.

I doubt that foreign investments in more developed countries
are so concentrated in capital cities. Can your clustering model
really explain this difference?

IOW, I do not claim that your model has zero relevance to
real world. I only think that there may be other, fundamental
and stronger factors that overwhelm the "clustering forces".

There is another factor in this game: govt is a big customer
and stability and consistency of legal acts as well as transparency
in this country leave much to be desired with, to put it lightly.

So the companies HAVE TO be close to the centers of power,
just to have its property secure. In this way it is most definitely
rational decision to invest in Warsaw even thought the office
space there is more expensive than in London (at least that was the
case several years ago).

> Not all corporations do that: in this country Coca-Cola has made
>> their big "green field" investment almost in the middle of nowhere
>> in this country. GM, Volkswagen, FIAT, and most of other carmakers
>> decisions for them.

>If their needs were for cheap land for greenfield factories, and cheap
>workers for said factories, then they were acting under very different
>forces than a midsize company looking to set up a mostly-sales branch
>office, not an industrial factory.

True. I grant that.

>> The cluster I've seen - an IT "corporate area" in Dublin,
>> Ireland -  was specifically created not due to "natural clustering",
>> but due to govt policy of tax breaks and preparing good
>> infrastructure in this place rather than some inter-business and
>> inter-customer dependencies, since e.g. Microsoft (where the company
>> sent me for  training) neither is able to get all the workers it needs
>> just from this city, nor it sells mostly to local customers, but it
>> sells all over Europe.

>That's addressing only the issue of endogenous vs exogenous original
>causes for clustering.  Many attempts to create clusters artificially
>have happened ever since the economical advantages of clusters were
>discussed in the literature, together with the crucial point that WHERE
>the cluster originally happens is in most cases almost random, it's
>self-reinforcing once it's properly underway.

Note that a lot of deliberate or half-deliberate attempts to create
clusters have failed: "content industry" in NY, there was a failed
attempt to create high-tech IT/telecom cluster in southern France,
etc. "Jumpstarting" the cluster should be easy if this model applied,
after which it should develop in a self-reinforcing manner. So why
deliberate attempts fail so frequently, while clusters appear in
other, unforeseen locations?

>Most such attempts have
>failed, because governments' powers aren't unlimited; Dublin is a good
>example of this strategy succeeding.

I'm not sure if this is correlation, but not causation; perhaps except
in a wider sense, like creating other good reasons for foreign
companies to invest in Ireland at all.

I see the "clustering" forces as a sort of derived factor: first,
there are fundamental issues that make the company set up
in that place or not - see it as "mass" in a physical analogy.
Inter-dependency issues, or "gravity" in a physical analogy,
comes only later. I do not claim that they can't have the influence
at all, by no means. I'm just skeptical of claims if they are of
primary importance.

>No matter WHY the good infrastructure is there, the tax breaks, the
>thriving community of high-tech workers, etc, a firm deciding where to
>set up may perfectly well find it rational to have all of these
>advantages overwhelm the issues of rents, congestion, competition for
>good workers.  In other words, my disagreement with your thesis that,
>because the government lowered taxes, taking advantage of that is NOT in
>the best interests of a firm's stockholders, is now maximal: I find your
>thesis not just wrong, but by now outright silly.

Huh? Of course it is in the interest of the company and stockholders
and they will most likely do it!

The point here is much more subtle: what I mean is that this
cluster has been created not so much by "gravity" and "repulsion"
forces as simple rational choice unrelated to inter-dependency
issues - so companies clustering in that place is definitely a
rational choice, given that Dublin is 2 million people city in a 5
million people country, they simply won't find workers elsewhere;
however, I'd hold this correlation as just correlation (with exception
of simple ability of finding most educated workers) and not
necessarily causation. That those were _other_ economic
factors - like Irish being highly educated, speaking English, and
living in a relatively inexpensive member country of EU - as the
decisive factors of that decision and not necessarily the typical
clustering factors like "being close to your customers". Speaking
in such terms, maybe Ireland as a whole country has been
such a "cluster", but then again, is such a cluster result of
"interdependency" issues or more fundamental factors, such
as historical circumstances, govt decisions, political stability,
secure property rights, corruption, etc? If the latter, I'd
argue that "clustering" in Ireland is a correlation, not
causation.

>> To me, the issue of manager having to face their superiors
>> asking him a question - "why on Earth have you decided
>> to locate our branch in the middle of nowhere in this country?
>> Why not in capital city? Can't you look at the map? Read some
>> stats how many inhabitants this city has and what is the
>> income level there?" is overwhelming: it would take long
>> time to explain for this manager who e.g. may have already

>You are wrong, because the same decisions get rationally made by
>sole-owner sole-manager companies where these considerations cannot
>apply.  Deciding where to site an imporant branch is a BIG decision: of
>course it takes a long time, *DUH*, and all sorts of factors are taken
>into consideration.

Then you have had a good luck of interacting with much, much
more reasonable managers than I have had. And that includes
some managers in some big multinationals, and not just in
this country. Sure, many managers I've seen were careful,
insightful and wanted to understand this issue well before
making the decision; but I have met equally many decisionmakers
who tended to be rash, careless and too quick in their judgments,
and really not prone to reconsidering their opinion if the new
evidence  came in. Sometimes I was scared silly to see how
carelessly the important decisions were made, because I knew
I may have to live with the consequences.

>> got his hands dirty in this industry in that country to know
>> that say, there's little revenue increase to be gained in
>> locating  the facility in capital city, the needed workers are
>> actually hard to find there, etc.

>So all of these factors are folded into a huge pile of reports in
>companies where such decisions are at all likely to be challenged later,
>and sign-off on the folders is carefully obtained for cover-up purposes.

>If the local development agencies of the "middles of nowhere in that
>country" don't do their job, including showering managers planning such
>decisions with supporting materials, that's a bad sign: maybe due to
>cultural influences foreign capital, professionals, and managers are NOT
>welcome there as they would be in a relative metropolis, for example.

That was not a factor here really. Most of that has to do with
the fact that regional and local branches of govt are exceptionally
clueless and lazy (and corrupt), at least when compared to govt in
capital city. However, I've observed that they're learning, esp. in
the north to north-western part of the country. The East, as usual, is
a no-man's-land. It's also the poorest part.

>> To me, this is much like decision whether do much of
>> development in  Python or MS VS / VB. "But everybody's
>> using VisualStudio / VB" is a simple and compelling argument:
>> "so many people can't be wrong", while explanations that
>> going Python may actually be better decision in this context
>> requires long and complex explanations and managers oft can
>> not even be bothered to read executive summaries.

>The issue of parallels or otherwise is by now totally secondary, to me,
>to the main issue that I find your approach to explaining regional
>clustering problems across industries totally, irredeemably, and
>horribly WRONG.  So, I'm not going to make the post even longer by even
>trying to address this part.  Few, besides the two of us, can be left
>reading by now, and clearly our disagreements on economics are so total
>that it's unlikely we can get anywhere by our discussions anyway.

I prefer to think that those are contrived issues and we rather
had some disagreements. As usual, when you leave the trivia,
and start on more complicated issues, it's not simple anymore.

>> I feel econ models frequently are elegantly designed
>> abstractions of elegantly designed problems; the problem
>> is how close those are to the real-world problems. At
>> the end of the day, it's "human action" that gets all
>> of that implemented. I've seen too much resources
>> going down the drain in completely idiotic projects
>> and decisions to believe managers are rational beings.

>When you claim managers are acting rationally (if selfishly) to avoid
>risk to themselves, you can't then justify this claim by adding that
>they aren't rational at all.

But that was my attempt of (poor) sarcasm actually... I did
not mean that literally. Sorry for that.

>Economics does cover, in its modern form,
>both issues of agency problems (misalignment of incentives between agent
>and owner) AND ones of "bounded rationality" (all the way from
>asymmetric information, to transaction costs relating to acquiring and
>processing information).  Trying to throw economics overboard because
>you can't be bothered to understand it is a kind of behavior that
>reminds me closely of the "leftists" you excoriate in your signature.

I forgot to change this sig when switching to here from political
ng, sorry.. It's just a sig but still OT given the nature of the
group.

Re "throwing the economics overboard" - perish the thought!

I don't know why you came to this conclusion, perhaps
I did not indicate clearly enough I meant the last paragraph in
an ironic way. On the contrary, I have the impression that I
belong to the small minority of people who consider economics
as science. Au contraire, people oft perceive me as believing
too much in relevance of economics!

That doesn't mean I have to seee _particular economic model_
as relevant. The history of economics is scattered with such
examples, like Phillips curve or Bowley's law (my favorite book
by Mark Blaug, "Methodology of Economics", worth a ton
of gold, quotes a long litany of such broken models).