Explaining the Geography of Proximity in Business

Geography of proximity in relation to business generally refers to a situation where a business or firm is located close to: similar firms, complementary firms, customers or suppliers, unrelated firms, universities and research institutes. Geographical proximity is associated with different forms of  advantages and disadvantages depending on the associated geographical proximity. Whereas location played an important role in traditional economies, with the current era of global competition, it involves a paradox. Several theories have been used to explain the existence of geographical proximity in business. These theories include: theories of governance, globalization theories, cluster theory and regionalization theory. This paper expounds on the above theories specifically on cluster theory as the basis of this discussion.

Proximity or geographical clusters are evident in today’s economies especially in advanced nations. This paper focuses on the importance of geographical proximity to businesses with the aim of unravelling underlying aspects of globalization, internationalization and regionalization and their supporting theories.

The Role of Government

Government plays and essential role in operations of businesses in developed economies for instance in the UK. The government provides framework for governance from which various business and institutions are administered. Businesses therefore do not operate in isolation but have to adhere to rules and regulations as provided by the government. The emergence of companies or business institutions in clusters exemplify a new way of thinking about national, state, and local economies, and they necessitate new roles for companies, government, and other institutions in enhancing effectiveness (Padgett, 2016).

Governance in this case is denoted as the way institutions manage themselves through systems of representation. The role of the state is to ensure that there are adequate systems in place for proper operations of business. These are achieved through enhancing function, effecting taxation, spending on tax revenues and developing industries effectively.

The key role of the government is regulation that is aimed at macroeconomic and political stability.the government also aims at improving the quality of factors of production for firms that provide them. Porter’s theory describes them as educated workforce, better infrastructure and accurate economic information. Thirdly, the government establishes regulatory bodies that govern competition that steers growth (Ansell and Torfing, 2017). The government is also tasked in developing and implementing programs aimed at mobilizing business institutions, stakeholders and citizens.

In most instances, growth is frustrated due to inability to implement as expected. Change in progress. A proper change should include necessary changes and must rise above  any anticipated interest. Ideally, such associate action program can occur not solely at the national level however conjointly at the extent of states and cities. Although these roles of state area unit necessary for economic development, they may not be decent (Sawyer, 2012). Furthermore, cluster circumstances become important to allow an economy to maneuver on competition. Government policies inevitably have an effect on the opportunities for upgrading clusters. For instance, many of the productivity and innovation advantages of clusters rest on spillovers and externalities that include public entities.

Importance of Geographical proximity to businesses

Geographical proximity of business plays a key role in advance nations like UK. For instance, resources, capital, technology, and other inputs can be efficiently sourced in global markets. Companies can easily get various inputs through corporate networks as opposed to locating near the market to access them. Porter’s argument is a micro economically based theory of national, state, and local competitiveness in the global economy (Ansell and Torfing, 2017). The porter’s theory of clusters defines clusters as geographic concentrations of related industries, their suppliers and service providers. These firms compete and cooperate in equal measure.

Despite the development of clusters in one kind or another has been recognized and explored in an exceedingly vary of literatures, clusters can not be understood without a broader theory of competition and competitive strategy in an exceedingly world economy. The prevalence of clusters reveals vital insights concerning the economics of competition and also the role of location in competitive advantage (Ansell and Torfing, 2017). At the same time as previous reasons for clump have diminished in importance with economic process, new influences of clusters on competition have taken on growing importance in associate progressively complicated, knowledge-based, and dynamic economy.

Geographic Location and competition

The perspective of the influence of geographical proximity on the competition of companies has recently been supported the straight forward views of however corporations contend. It’s noted that such competitions are viewed as static and resting on price diminution during a comparatively closed economy. Increasing returns to scale is essential as comparative advantage in factors of production is essential (Johana, 2014). Ideally, competition is totally different because it entirely depends on pursue strategic variations and advancement. Location affects competitive advantage through its influence on productivity and particularly on productivity growth. Generic issue inputs them sometimes are extensive and pronto accessed. Prosperity depends on the productivity with that factors are used and upgraded during a specific location.

Economic development seeks to realize long property development during a nation’s commonplace of living, adjusted for buying power parity. Commonplace of living is decided by the productivity of a nation’s economy, that is measured by the worth of the products and services (products) made per unit of the nation’s human, capital, and physical resources. Productivity, then, defines fight. The idea of productivity should embrace each the worth (prices) that a nation’s product command within the marketplace and also the potency with those commonplace units are made (Sawyer, 2012).

A geographically proximate cluster of freelance and informally joined companies and establishments represents a sturdy structure type within the time between markets and hierarchies, however one that also is no explored within the management field (Johana, 2014). Location could be a powerful variable shaping the trade-offs between markets and hierarchies. Clusters supply obvious group action price benefits over different forms and appear to ameliorate several incentive issues. Continuous interaction and informality of contracts inside the structure ensuing from living and dealing during a geographical area foster trust and open communication whereas reducing the prices of severance and recombining market relationships (Alcacer, Kogut, Thomas andYeung, 2017).

The productivity and prosperity of a location rest not on the industries within which its companies contend however rather than on how they contend. Companies become more productive in any trade if they use refined strategies, advanced technology, and supply distinctive product and services, whether or not the trade is shoes, agriculture, or semiconductors. All industries will use “high technology,” and every one industry is “knowledge intensive.” Michaux, Cadiat and  Probert (2015) argue that innovation is employed to ask fields like data technology and biotechnology, is of questionable connectedness. A higher term can be facultative technology to indicate that these fields offer tools that may enhance technology in several different industries.

Conversely, the mere presence in any trade doesn’t by itself guarantee prosperity if companies there are unproductive. Raising the productivity of all industries enhances prosperity, each directly and thru the influence one trade has on the productivity of others. National productivity ultimately is about by the sophistication (e.g., technology, skill) with that corporations contend. Unless corporations become more productive, economy cannot become thrive (Sawyer, 2012). The sophistication of companies’ approaches to competitor determines the costs that their product and services will command and also the potency with what they manufacture.

Company sophistication in terms of competitiveness is according to porters theory focuses on operational effectiveness or the extent to that corporations during a nation approach best follow in areas like production processes, technologies, and management techniques. The second side of company competitiveness relates to the categories of ways corporations use like the power to contend on differentiation and not simply price, the array of services that may be provided, and also the approaches utilized in mercantilism internationally.

The influence of  in a geographical location is greatly attributed to the standard of the political economy business atmosphere. Some aspects of the business atmosphere just like the government taxes,infrustructure are commonly applied to all companies (Sawyer, 2012). These aspects are vital and infrequently represent the binding constraints to competitiveness in developing economies. Moreover with advanced economies however, decisive aspects of the business atmosphere for copetitiveness largely depend on geographical proximity to suppliers,skilled workers or institutions.

Advantage of Geography of Proximity

Geographical proximity impacts competition in various ways. The most common are increasing productivity, capacity for particular cluster of business and stimulating new business startups. Competitive advantage therefore results in spill overs across firms and associated institutions. The three aspects of geographical proximity influence much depending on the coexistence between the firms and their workforce in terms of communication and network. Although the existence of a cluster makes such dealings more likely to progress and become effective, they are far from spontaneous.

Geographical proximity and Productivity

Studies have established that concentration of firms within one geographical area more effective on cost minimization as a result of adequate inputs to the markets. However, these findings have been challenged by globalization of markets, source of supply, seamless mobility, skills and the cost of transport and communication. In modern time, however, the extent of economies arising from cluster of firms in a geographical area have taken Centre stage.

Sourcing inputs outside the cluster may be ideal if competent native suppliers are out of stock, but it is not the most effective outcome. As a result of integral edges of clusters, even so, forces inspiring local supplier improvement and elevation are durable, constituent corporations having associate incentive to encourage entry of recent suppliers or local investments by distant suppliers.

Access to information in depth market, technical, and different specialised info accumulates within the corporations and native establishments inside a cluster which will be accessed higher or at lower value, permitting corporations to lift current productivity by obtaining nearer to the productivity frontier. This additionally applies to the flow of knowledge between units of a similar company (Great Britain, 2011).  Proximity, offer technological linkages, and also the existence of recurrent personal relationships and community ties fostering .It also facilitate flow inside clusters getting information regarding current customer desires is a vital special case of the informational edges of clusters. Refined patrons usually are a part of clusters, and different cluster participants have info regarding customer desires that always is shared.

Clusters make several inputs that otherwise would be pricey into public goods. The flexibility to recruit staff already trained in native coaching programs, for instance, eliminates or lowers the value of internal coaching. Corporations usually will access specialised infrastructure, recommendation from specialists in native establishments at  low price. Indeed, the data designed up at a cluster are often seen as a quasi-public sensible.

Some of the public or quasi-public goods obtainable in clusters are similar to standard public goods within the sense that they’re closely connected to government and public establishments. Conversely, different quasi-public merchandise obtainable to cluster participants square measure created as a natural byproduct of competition.  These embody info and assortment  of technology, the name of the cluster location, and a few of the promoting and sourcing advantages. According to Hill and Jones (2015), public goods at certain geographical location usually eminate from non-public investments in coaching programs, non-public infrastructure, quality centers, and different forms that profit a cluster. Non-public investments in cluster-specific public goods are common as a result of the collective edges perceived by cluster participants. Often, such non-public investments publically goods  manifest itself  via  trade associations.

Clusters assist to unravel or hedge agency issues that arise in additional isolated locations and in additional vertically integrated corporations. Clusters improve the incentives at intervals corporations for achieving high productivity for many reasons. the primary is competitive pressure. competition with local based competitors has notably sturdy incentive effects due to the benefit of constant comparison and since native rivals have similar general circumstances like local market access,labour prices and utility prices. Competition therefore arise in other aspects as well.

Clusters and Innovation

Firms within a given geographical area are able to benefit from various advantages that come with innovation, productivity and growth. Cluster participation offers many potential advantages in innovation and improvement compared to an isolated location. Some of the cluster features that enhance current productivity are even more essential to innovation (Karlsson, 2018). Firms within a cluster normally identify new buyer’s needs easily and urgently. Just as with current buyer needs, firms in a cluster profit from the concentration of firms with buyer knowledge and relationships, the combination of firms in related industries, the concentration of specialized information-generating entities, and buyer sophistication. Cluster firms often can discern buyer trends faster than can isolate competitors. Silicon Valley and Texas-based computer companies, for example, plug into customer needs and trends quickly and effectively and with an ease impossible to match elsewhere.

Cluster participation additionally offers benefits in perceiving new technological, operating, or delivery potentialities. Participants will be exposed to richer insights into evolving technology, element and machinery availableness, service and promoting ideas. Continuous relationships with alternative entities inside the cluster facilitate such learning, as do the convenience of website visits and one on one contact. Direct observation of alternative corporations is expedited. The isolated firm, against this, faces higher prices and vessel impediments to collection insights.

Geographical Proximity and Economic Policy

Geographical proximity provide a better approach to policy areas that touch on the basic needs of the economy.  This will facilitate focus priorities and provide framework on various areas such as education,technology,orign investment fostering and other relevant things of economic importance (Johana, 2014). A cluster approach highlights the very fact that government is more involved in various aspects than is usually thought of.Cluster theory makes the impacts of policies on competitive position a lot of clearer and broad. Effective solutions typically need completely different elements of state to collaborate.
Finally, additionally to complementing policy attention at the economy-wide level, cluster perspective highlights the necessary roles of state at many geographic levels. the normal focus of policy has been at the national level, and lots of aspects of the final business ar best self-addressed there. Recently, globalisation has targeted attention on worldwide three-way establishments. However, state, metropolitan region, and native governments even have a crucial influence on the final business atmosphere in a very location. At the cluster level, these influences typically are dominant, and clusters ought to represent a crucial part of state and native policy. An honest example is that the town of York within the UK (Sawyer, 2012).

The recent governance structure has seen the New York City a city of govern not only by itself but also across its territories. Since then the city governing council has been aggressive in industrial development evident from its establishment of units on industrial development.


It is true that geography of proximity has significance in abundance to the economy. The cluster approach provides native economic development advantages. Clusters strengthen localization economies. The concentration of associate degree trade at a selected location could lead to vital price savings to corporations within the cluster. These cost savings are considered as localization economies. It collectively fosters industrial reorganization. The transition in industrial organization from massive corporations engaged in production to little corporations centred on specialty production is well documented. This transformation in industrial structure is attributed to accumulated world competition and therefore the emergence of latest production technologies.

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