The theory of external economies explains this tendency of industrial clusters to break up and move to locations with lower wages when the technology of the industry is no longer rapidly improving.

External economies refer to the benefits that firms obtain when they locate near each other ('clustering'). These benefits can include access to a large pool of skilled labor, shared infrastructure, and the flow of knowledge and innovation among firms.

1. When the technology of the industry is no longer rapidly improving, the need for being at the cutting edge of innovation decreases. This reduces the advantage of clustering, as firms no longer need to be close to each other to share and benefit from the latest technological advancements.

2. Similarly, when the need for highly skilled workers declines, firms no longer need to be located near a large pool of skilled labor. This reduces the labor market pooling advantage of clustering.

3. With the decrease in the need for the most modern machinery, the shared infrastructure advantage of clustering also decreases. Firms no longer need to be located near each other to share high-tech infrastructure.

4. As the advantages of clustering decrease, the costs of clustering (such as high wages and high rent) become more prominent. Firms may find it more cost-effective to move to locations with lower wages.

5. Therefore, when the external economies of clustering decrease, firms tend to break up and move to locations with lower costs. This is especially true for industries where the technology is no longer rapidly improving.

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The theory of external economies explains this tendency of industrial clusters to break up and move to locations with lower wages when the technology of the industry is no longer rapidly improving.

External economies refer to the benefits that firms obtain when they locate near each other ('clustering'). These benefits can include access to a large pool of skilled labor, shared infrastructure, and the flow of knowledge and innovation among firms.

1. When the technology of the industry is no longer rapidly improving, the need for being at the cutting edge of innovation decreases. This reduces the advantage of clustering, as firms no longer need to be close to each other to share and benefit from the latest technological advancements.

2. Similarly, when the need for highly skilled workers declines, firms no longer need to be located near a large pool of skilled labor. This reduces the labor market pooling advantage of clustering.

3. With the decrease in the need for the most modern machinery, the shared infrastructure advantage of clustering also decreases. Firms no longer need to be located near each other to share high-tech infrastructure.

4. As the advantages of clustering decrease, the costs of clustering (such as high wages and high rent) become more prominent. Firms may find it more cost-effective to move to locations with lower wages.

5. Therefore, when the external economies of clustering decrease, firms tend to break up and move to locations with lower costs. This is especially true for industries where the technology is no longer rapidly improving.

Knowee AI · Accepted Answer

The theory of external economies explains this tendency of industrial clusters to break up and move to locations with lower wages when the technology of the industry is no longer rapidly improving.

External economies refer to the benefits that firms obtain when they locate near each other ('clustering'). These benefits can include access to a large pool of skilled labor, shared infrastructure, and the flow of knowledge and innovation among firms.

1. When the technology of the industry is no longer rapidly improving, the need for being at the cutting edge of innovation decreases. This reduces the advantage of clustering, as firms no longer need to be close to each other to share and benefit from the latest technological advancements.

2. Similarly, when the need for highly skilled workers declines, firms no longer need to be located near a large pool of skilled labor. This reduces the labor market pooling advantage of clustering.

3. With the decrease in the need for the most modern machinery, the shared infrastructure advantage of clustering also decreases. Firms no longer need to be located near each other to share high-tech infrastructure.

4. As the advantages of clustering decrease, the costs of clustering (such as high wages and high rent) become more prominent. Firms may find it more cost-effective to move to locations with lower wages.

5. Therefore, when the external economies of clustering decrease, firms tend to break up and move to locations with lower costs. This is especially true for industries where the technology is no longer rapidly improving.

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