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A Spatial Interpretation of The

A Spatial Interpretation of The

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ABSTRACT.In this paper the density dependence model,which was developed in organizational ecology, is com-pared to the economic-geographical notion of agglomerationeconomies. There is a basic resemblance: both involve someform of positive feedback between size of the population andgrowth. The paper explores how the theoretical conceptscompare to each other, and if an interdisciplinary cross-fertilization between both is fruitful. It is found that there area number of important similarities in the underlying theories.These refer to the process of legitimation, which has someclose similarities to concepts derived from theories of newindustrial districts, such as social capital, institutional thick-ness, and innovative milieux. Differences remain importantas well. For instance, the sociological interpretation of com-petition is not transferable into notions of agglomerationeconomies. An important conclusion is that agglomerationeffects can and should be incorporated into the density depen-dence model.
1. Introduction
Industrial demography, or demography of the firm,is concerned with the analysis of demographicprocesses of entry, exit, and firm growth in indus-tries. Although the field is not new, recently it hasreceived renewed interest from disciplines such associology (Hannan and Freeman, 1977, 1989;Carroll and Hannan, 2000), geography (van Dijk and Pellenbarg, 2000), industrial organization(Geroski, 1995; Audretsch, 1997; Caves, 1998),and demography (van Wissen, 2002). The mainreasons for this increased interest are twofold:first, it is related and runs parallel to the increasedawareness of the role of the SME sector in theeconomy, both in terms of its role as employmentgenerator, and as one of the agents of innovation.Second, the increased availability of (longitudinal)micro-information of firms allows the empiricaltesting of theories of processes of firm formation,firm growth and survival. It is probably fair to saythat organizational sociologists have been mostactive in this area in the last decade, as witnessedfor instance by the work of Carroll, Hannan, andFreeman (Hannan and Freeman, 1989; Hannan andCarroll, 1992; Carroll and Hannan, 2000). In thesociological approach to the demography of thefirm, which is called
organizational ecology
(inthis paper henceforth called OE) modelling andempirical testing of demographic processes of change in what is termed populations of firms arevery important. As a result, OE researchers havediscovered a number of illuminating empiricallaws of the demographic behaviour of populationsof firms over time. The model of 
density depen-dence
, which states that the growth path of anindustry (in OE called organizational populations)over time is dependent on the number of firms(size) in that industry, is particularly interesting inthis respect. Understandably, their explanation of this density dependence is founded in sociologicaltheory, although there are a number of clearsimilarities with industrial organization and eco-nomics (Boone and van Witteloostuijn, 1995).In spatial sciences such as economic geographyand regional science, the demography of firms isused to describe and explain interregional differ-ences in economic growth (Storey, 1994). Thisapproach has close links with a number of other
A Spatial Interpretation of theDensity Dependence Modelin Industrial Demography
 Leo van Wissen
Small Business Economics
22
: 253–264, 2004.
2004
Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on May 28, 2003
Faculty of Spatial SciencesUniversity of GroningenP.O. Box 8009700 AV, GroningenThe Netherlandsand  Netherlands Interdisciplinary Demographic Institute NIDI The HagueThe Netherlands E-mail: l.j.g.van.wissen@frw.rug.nl
 
fields: on the one hand entrepreneurship studies,and on the other hand regional growth theory.A central concept in regional growth theory is
agglomeration economies
. The goal of this paperis to explore the linkages between the OE theoryof density dependence, and the concept of agglom-eration economics, as developed by regionaleconomists and geographers. In this paper I arguethat an interdisciplinary cross-fertilization of thedensity dependence model with agglomerationeconomies potentially has a number of attractivefeatures. Both include an element of positivefeedback between population size and growth, orcumulative causation. Although there are largedifferences as well, it is worthwhile to explore thepotential benefits of cross-fertilization in terms of theory and applications. The OE concept lacksany explicit notion of space, and it may be worth-while to explore if and how notions from spatialsciences might be applicable in this setting. At thesame time, agglomeration economies, despitebeing widely recognized as an important expla-nation for geographical differences in economicgrowth, have remained something of a black box. Moreover, it has been difficult to establishthe precise causal linkages in empirical work.Here, the methodological and empirically foundedapproach of organizational ecology may prove tobe useful.When two disciplines study the same phenom-enon, there is always the problem of different ter-minology and concepts. In this respect terms usedby OE may cause some confusion among econo-mists. Therefore, it may be helpful to clarify a fewdifferences between OE and economics at theoutset. First, sociologists talk about organizations.For them firms are just a specific type of organi-zation, and some of these results may equallyapply to non-market organizations, such as labourunions. In fact, OE carried out in-depth studies of non-market organizations, such as labour unions,or day-care centres. While keeping this in mind,in this article we speak about firms throughout.Second, organizational
density
is the size of thepopulation, which is measured by the number of firms in the population. The density dependencemodel describes the time trajectory of the numberof firms in a population. It is therefore closelyrelated to the notion of the industry life cycle inindustrial organization. However, OE focusesalmost exclusively on the number of firms, andputs less emphasis on firm size, firm growth andmarket structure. Third, OE deals with popula-tions, not individual firms. Populations arebroadly similar to industries, or markets, such asbeer breweries, car industries, or newspaperpublishers. Fourth, the population under study ishomogeneous with respect to the organizationalactivity or production process. There is a clear dif-ference here with industrial organization, whichstresses the heterogeneity of firms in a market.Nevertheless, product differentiation and special-ization are also important in OE that may affectthe population density over time. Fifth, OEfocuses on founding and failure of organizations(firms), whereas economists prefer to talk aboutmarket entry and exit. There is clearly substantialoverlap, but market entry is not only possiblethrough the start of a new firm, but also throughproduct diversification, or the opening of sub-sidiary units in other geographical markets byincumbent firms. A similar argument holds for exitand firm failure. Sixth, the time horizon taken byOE is usually very large. For instance, the densitydependence model of the evolution of the breweryindustry in Bavaria covers the period from the16th century until now. The original goal of OEwas to find empirical regularities that applyequally for different industries in all time periods.Seventh, markets are not very important in OE. Aswe shall see below, the concept of competition isimportant, but used in a broader sense. More gen-erally, the notion of rational behaviour, or profitmaximization is not accepted as the driving moti-vation for firms. Rather, this role is taken by forcesof natural selection and organizational inertia.The paper is organized as follows. In Section2 the density dependence model developed by OEin the field of industrial demography will be pre-sented. I will summarize the main features of theconcept of agglomeration economies in Section3. Section 4 shows how cross-fertilisation ispossible and useful. Section 5 concludes.
2. The density dependence model
OE and industrial demographers have since longdiscovered a basic empirical law in the develop-ment of the number of firms in an industry. Basedon these observations, they have formulated a254
 Leo van Wissen
 
general model of long-term organizational evolu-tion, which is called the density dependence model(Hannan and Freeman, 1977; Hannan and Carroll,1992; Carroll and Hannan, 2000). According tothis model, vital rates of birth and death of firmsare dependent on the size of the population, thepopulation density. Generally it is found that thereis a non-linear effect of population size onfounding rates, with an increasing effect at lowlevels, and a decreasing effect at high levels.Similarly, there is a non-linear effect on failurerates, with a decreasing effect at low densities, andan increasing effect at high levels. This leads to aclockwise pattern of founding rates on density, anda U-shaped pattern of mortality on density. Thepopulation growth rate is the combined effect of birth and death rates. Due to the large variationin the precise forms of these dependencies, popu-lation growth patterns vary considerably, butthey are variations of a basic growth pattern, asdepicted in Figure 1. When the size of the popu-lation is small, founding rates are small and mor-tality is relatively large. Overall, growth rates aretherefore small. For unsuccessful populations anegative growth rate may even result if mortalityexceeds founding from the start and the popula-tion will cease to exist without ever having grownto maturity. For more successful populations,initially growth rates are small, but as the densityincreases (the number of firms increases) foundingrates increase, mortality rates decrease, and theoverall growth rates increases. When foundingrates are at their maximum and mortality rates neartheir minimum level, the growth rate of thepopulation is at its maximum. Beyond this level,the founding rate decreases, the mortality rateincreases, and consequently the growth ratedecreases. As a result, the size of the populationstabilizes at the level of the
carrying capacity
.This overall growth pattern of initially slowgrowth, followed by rapid growth, and proceededby stabilization or decline in the size of thepopulation is verified empirically in numerouspopulations of firms and organizations. See Carrolland Hannan (2000), for an overview of the liter-ature.Two basic forces are responsible for the sizedependency of firm founding and failure:
legiti-mation
and
competition
. Both forces are linked tothe size of the population. Legitimation refers tothe extent that a new organizational form orindustry is known and accepted in society. Carrolland Hannan refer to this as the taken-for-granted-ness of an organizational form, or more formally
constitutive legitimation
. When a new industryemerges, customers are not familiar with theproduct, investors are reluctant, and there may belegal or institutional constraints that prevent freemarket introduction. Legitimation increases withthe number of firms: the product becomes morefamiliar for customers, knowledge increases, andinvestors become less reluctant. Founding and dis-banding are related to the level of legitimation of an organizational form. The founding rate is pro-portional, and mortality is inversely proportionalto the level of legitimation.The second underlying force is competitionbetween firms. In OE the term competition haspredominantly a social interpretation. Here, com-petition means conflict, rivalry. It arises as a resultof the interactions within a social system. Inaddition to this social interpretation, there is alsoan economic interpretation to which we will comeback below. However defined, there is clearly apositive relationship between the number of firmsand the level of competition. As the size of thepopulation increases linearly, it may be argued thatcompetition increases geometrically (Hannan andCarroll, 1992). This means that the addition of anew firm to a small population has less impactthan adding an extra firm to a large population.Founding and disbanding rates are related to com-petition. The founding rate is inversely propor-
 Density Dependence Model in Industrial Demography
255
Figure 1. Density evolution over time in the density depen-dence model.

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