30 June 2015
* There is significant evidence of productivity spillovers associated with the clustering of informal firms in Cambodia
* Formal and manufacturing firms, however, do not experience the advantages of agglomeration economies due to pressure from direct competitors
* Benefits derived from improvements in productivity as a result of the clustering of economic activity of firms in Cambodia most often do not outweigh the negative effects of competition created by nearby firms
What types of businesses benefit or suffer due to geographic clustering? Data available from Cambodia on competition and spillovers--at both village- and commune-level--is useful to answer a number of questions about the effects of clustering and the possible benefits or drawbacks of encouraging the concentration of industries in specific zones in developing countries.
Is firm productivity enhanced by clusters?
In Cambodia, firm clustering at both village- and commune-levels is usually indicative of higher measured firm productivity. However, data also reveal that a large number of competing firms operating within the same sector at either village- or commune-level can have a negative impact on the productivity of firms. In other words, increased competition created by the clustering of similar economic activities in one zone often results in a decrease in productivity as competitive pressures begin to take a toll on individual firms, eventually resulting in lower revenue levels for a given input level.
Does the impact of clustering differ depending on industry and firm size in Cambodia?
While businesses are generally more productive in more densely populated clusters, the manufacturing and service sectors do not benefit from clustering in the same way--service sector firms perform better in agglomerations of economic activity where they are located closer to target customers; manufacturing firms experience more pronounced effects of competition and thus must often diversify their customer bases by targeting larger areas. The subsequent diversification of manufacturing customer bases may be hindered due to high transport costs or a lack of relevant market information.
The majority of Cambodian firms are quite small, with most employing less than 10 people. Despite this, there does not appear to be a substantial difference between the effects of competition experienced by small firms compared to those confronting larger industrial firms.