Economic Geography

Ron Martin

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Success for a regional economy, then, would mean providing sufficiently attrac-
tive wages and/or employment prospects and return on capital to draw in
labour and capital from other regions. It makes sense, then, to talk about
‘competitiveness’ for regions in a way one wouldn’t talk about it for larger units.
(Krugman 2003: 19)
Underpinning these discussions of regional and city competitiveness 
by economists such as Porter and Krugman is a rethinking of trade and a redis-
covery of increasing returns.
Standard (mainstream) economic theory would suggest that the capacity of a
region to compete is shaped by an interplay between the attributes of region (or
cities) as locations and the strengths and weaknesses of the firms and other
economic agents active in them. If markets worked perfectly, it might be expected
that inter-regional cost differentials would adjust to give rise to a pattern of
regional trade in which comparative advantage (differences in factor endowments)
determined relative specialisation and trade amongst regions (and cities). However,
the persistence of regional differences in key economic indicators (such as incomes
and employment) suggests that there are systematic differences in the relative
attractiveness of different regions and cities. We know for example that move-
ments of capital and labour are not such as to eliminate differences in costs and
returns between regions. Thus, as Krugman argues, the ability of a region or city
to attract capital and labour is both a measure of its competitiveness as a location
and a source of cumulative competitive advantage for that region or city. This
point is also emphasised by the geographer Michael Storper, who defines regional
competitiveness as:
the ability of a regional economy to attract and maintain firms with stable or
rising market shares in an activity while maintaining or increasing standards
of living for those who participate in it.
(Storper 1997)
A not dissimilar focus on the relative attractiveness of places is also to be found
in Richard Florida’s work, which argues that it is not so much the ability of places
to attract firms, but rather their ability to attract and retain ‘creative people’ that
matters for regional growth, so that places compete as locations for such people,
and their success in attracting them in turn shapes the relative competitive
performance of those places. Florida’s theory is that:
Regional economic growth is driven by the location choices of creative
people – holders of creative capital – who prefer places that are diverse, toler-
ant and open to new ideas . . . It identifies a type of human capital, creative
people, as being key to economic growth, and . . . it identifies the underly-
ing factors that shape the location decisions of these people, rather of merely
saying that regions are blessed with certain endowments of them.
(Florida 2000: 223)
Economic geography and the new discourse of regional competitiveness
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In addition, it now accepted that Ricardian comparative advantage (relative
factor endowments) theory is not the only basis for trade between nations, 
and that increasing returns within industries also play a key role. Economists
have also recognised that a nation’s globally competitive industries, those in
which it has a trading advantage, often tend to be geographically concentrated 
in particular regions and localities. This has led to the acknowledgement that
many of the increasing returns in contemporary economic development are
regional or local in origin, in the form of external economies associated with the
geographical agglomeration of industry and with neo-Marshallian districts or
clusters of economic specialisation, and that to understand such issues as trade,
competitiveness, innovation and productivity, we need to examine these local
externalities.
Economic geographers have of course drawn equally heavily on external
economies ideas in recent years. Whether the terminology used is that of indus-
trial districts, clusters, or local production systems, the argument is that the close
geographical proximity or spatial agglomeration of similar and related firms
(often, but not always, in some complex inter-firm division of labour) enables
firms to benefit from a range of locally-emergent and locally-embedded external-
ities, such as access to specialised labour and specialised suppliers, spillovers 
of technology and knowledge, specialised institutions, and networks of trust 
and shared business cultures and practices (or what geographers have come to
call ‘untraded interdependencies’). These local externalities, in one form or
another, are now widely argued by geographers to be an important basis of
regional economic success. Not only do such externalities influence the nature
and extent of ‘collective learning’ and innovation amongst the firms (and 
institutions) making up an industrial district or cluster (Maskell et al. 1998), they
also shape the attractiveness of the locality to other similar firms, workers 
and institutions. In short, favourable local externalities raise the ability of 
local firms to compete, whilst also attracting firms, workers, and ideas from 
elsewhere.
What these economic and geographical literatures on localised externalities
point to is the importance of locally emergent and embedded effects in the shap-
ing of regional competitive advantage. Indeed, Krugman (2003) identifies two
primary sources of regional competitiveness: ‘regional external economies’, and
‘regional fundamentals’:
Given that modest differences in total factor productivity can have large
growth consequences at the regional level, what accounts for such differ-
ences? A broad division would be between ‘fundamentals’ – differences rooted
in a region’s characteristics – and ‘external economies’ that are themselves a
consequence of a region’s pattern of economic development. 
(pp. 23–4)
Regional external economies are the (neo-Marshallian and related) localisation
economies referred to above. These emerge as a consequence of the development
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Ron Martin

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of geographical concentrations of specialised or interrelated activities. They form