28 January 2019

Economic Development Is Path Dependent

We think about our economy being global. But, it actually is quite geography dependent with economic growth and particular industries being highly concentrated in location. 


A key factor is that most industries involve networks of firms. A factory or manufacturing company isn't an island. It is a hub of other factories and firms that provide it with parts and services that it needs.

So, when Apple tried to build a Mac factory in Texas they had a problem. Texas didn't have the network of suppliers that Apple had at its factories in China. And, this lack of key suppliers for necessary parts was one of the important reasons that Apple abandoned its plan to build Macs in Texas in favor of the Chinese status quo where the whole network, only some of which was owned and controlled by Apple itself, present.

Once the network is in place, the incentive to continue to develop the economy in places that have the other components of the network in place usually prevails over the desire to relocate a firm or part of its activities somewhere else. And, when the same incentive applies to all firms in an industry, you get massive development in some places, while other places which have all the raw materials and much of the human capital needed are passed over.

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