Demand-side VS supply-side agglomeration

It is important to distinguish between the demand-side and supply-side agglomeration to identify and build a clearer understanding of agglomeration, which has been recognised by many scholars including Marshall himself. Supply-side agglomeration refers to the geographical concentration of specialised input (physical and human capital) providers which grants local access to services and more efficient tacit knowledge transfers, where as demand- side agglomeration refers to the geographical concentration of related or similar firms which reduces consumer search costs and increases in demand (McCann and Folta, 2009). McCann and Folta (2009) summarised the differences between the two types of agglomeration – Table 3.1. The researchers have argued that depending on the type of agglomeration, due to the difference in their sources, different features of agglomeration and its effects will be perceived. Yet, little has been done regarding the operationalisation of the theoretical and empirical implications of the differences.

In the context of T&H, majority of the few studies on agglomeration are focussed on the demand-side agglomeration. This is because, following Table 3.1, the industry itself is highly localised, driven by demand and tourists tend to reduce their search cost to maximise their utility of time and costs (Adam and Mensah, 2014). Additionally, in the case of the hotel

Table 3.1 Differences between supply-side and demand-side agglomeration Supply-side agglomeration Demand-side agglomeration

Source of agglomeration

• Specialised inputs, labour and knowledge spillovers

• High demand and low consumer search costs

Composition • Both horizontally and vertically related firms – focal firms, suppliers, relevant institutions (universities, consultants, etc.) • Related industry firms, producers

of complementary products and primary consumer groups

• Mainly horizontally related firms • Focal firms

• Perhaps firms with complementary goods

Relationship complexity

• High

• Large number of both vertical and horizontal relationships between the member firms • Knowledge flows across these

relationships, a relatively complex process

• Knowledge that flows is often tacit

• Low

• Realising agglomeration benefits does not require any intra-cluster firm relationships to exist

• If inter-firm relationship does exist, relationships tend to involve exchange of explicit information

Geographic size • Physical adjacency is not necessary to realise benefits of agglomeration

• Can extend over a fairly wide geographic range

• Physical proximity is necessary for low search costs

• Tighter clustering is expected

Source of diseconomies

• Congestion costs and increasing input prices are less likely to develop as quickly

• Adverse selection concerns may be balanced by ‘better’ firms benefitting more

• Congestion costs and increasing input prices are more likely to develop as quickly

• Adverse selection concerns are not balanced by ‘better’ firms

benefitting more

• Increased localised competition Life cycle • Initial development should take

longer

• Takes longer to reach diseconomy stage

• Initial development should not take long

• Quicker to reach diseconomy stage Temporal

changes in value

• Growing

• As successful competition continues to become more dependent on knowledge and innovation, cluster value should continue to increase

• Decreasing

• Falling transportation costs and increased information availability make it less costly to gather information about heterogeneous products

industry, agglomeration externalities can exist and be received between hotels in a cluster despite there is no established relationship between them and no shared information amongst the clustered hotels (McCann and Folta, 2009). Nevertheless, there are proximate hotels that have connections and share information, which tends to be explicit rather than tacit (Kalnins, 2006). Examples of T&H-context studies that have examined demand-side agglomeration show significant impacts on the industry. Chung and Kalnins (2001) and Kalnins and Chung (2004) found that agglomeration increases demand in the US lodging industry, especially in rural markets where the reduction of guest search costs can be more effective. However, contributions to demand-side agglomeration were found to be asymmetric: some cluster firms contribute to agglomeration economies and spillover effects, whereas other cluster firms only benefit from agglomeration economies and spillover effects (Shaver and Flyer, 2000). Thus, this tends high-resource firms to avoid markets with high numbers of low-resource incumbent firms, which can lead to adverse selection and firms avoiding to co-locate.

However, robust empirical findings are very limited in the context of supply-side agglomeration and T&H. Adam and Mensah (2014) found that hotels desire to benefit from other hotels in co-location, which supports the supply-side agglomeration benefits of production enhancement, which can enhance hotel performance (Baum and Haveman, 1997; Chung and Kalnins, 2001; Egan, Chen and Zhang, 2006). The studies mentioned above has been in the context of the lodging industry, which may be considered to be too narrow compared to the whole T&H industry. Observing the features of supply-side agglomeration in Table 3.1, such type of agglomeration can also be closely associated with the T&H industry. For instance, T&H clusters are comprised of related industry firms, producers of complementary products and primary consumer groups (Porter, 1998a; Weidenfeld, Butler and Williams, 2011). Additionally, with the T&H industry facing challenges in productivity enhancement and difficulties in retaining its labour, the supply-side of agglomeration is relevant in terms of addressing these challenges rather than the demand-side agglomeration. The geographical concentration of human capital providers can grant local access to services and more efficient tacit knowledge transfers, which can facilitate T&H firms to improve in their labour productivity via both competition and collaborative behaviours, increasing the value for the T&H cluster in the long run. However, to the best of the researcher’s knowledge, there is no study that have examined the supply-side agglomeration economies and the effects on labour productivity of T&H firms; the current research is the first attempt to analyse this proposition.

The following sections will critically review the trinity of agglomeration economies – input- output linkages, labour market pooling and knowledge spillovers – in more depth.