What is agglomeration?
Agglomeration refers to the phenomenon of clusters of business activity as a result of firms being located close to each other. Agglomeration can be described as a process that concentrates economic activity in one place to make businesses more productive.
The role and nature of agglomeration economies
- Shared resources: the firms that are located close to each other in an agglomeration economy share infrastructure, facilities, suppliers, and workers. Transports networks, as well as telecommunications infrastructure, is valuable depending on the density of the network. As the size of an agglomeration economy increases, so does the opportunity for intermediate suppliers to offer goods and services.
- Matching: agglomerate economies having large and diversified markets have better matches between employers and employees as well as firms and intermediate suppliers. This significantly reduces cost because it widens the scope of business activity, thus providing better employment opportunities.
- Learning: knowledge exchange is considered critical to growth and innovation in rapidly changing industries. When a firm becomes a part of an agglomeration, it goes through a learning process that helps the firm operate in the most effective manner.
Disadvantages of agglomeration
Although agglomerate economies boost the economy, they can also have a detrimental effect in the following ways :
- Environmental effect: clusters of business activity in metro cities contribute significantly to pollution, traffic, and other externalities that occur by clustering of a population of firms.
- Competition: because of the closely clustered business activity, firms often find themselves in losses because of increased competition
- Overburdened infrastructure: the accumulation of businesses in certain areas can cause a strain on the infrastructure.
- Corruption: because of the highly competitive nature of the economy, firms often find that they resort to other illegal methods in order to earn profits.