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Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

1.1 Definition
1.2 The Agglomeration Theory
2.1 The Characteristics
2.2 The Role of Economic Agglomeration
3.1 Global
3.2 National perspectives
3.2.1 National Plan 11 (Rancangan Malaysia Ke 11- RMK 11)
3.2.2 National Physical Planning
3.2.3 National Urbanization Policy
3.3 Scenario of Economic Agglomeration In Malaysia

Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

1.0 Introduction
This report prepared as to fulfil the group assignment (Task 1) under the course UDM 751:
Urban Economics and Finance. As for that purpose, this report will review and discuss the
scenario of economic agglomeration in major city in Malaysia by choosing Kuantan as a case

1.1 The definition of Economic Agglomeration

Economic agglomeration is the global or universal phenomenon that has been studied for
more than a century. The industrialization become one of the core force of driving force in
the phenomenon of rapid urbanization in Asia since 1980. Manufactured industries
concentrated to relocate in the town centre and also it surrounding area. Both agriculture
and industrial are side by side but some time it seems even competing over land around urban
centre where it vanishing the distinction between the rural and urban scape. The industries
tend to agglomerating to gain a foothold in the area or region that has a high potential to
meet their needs and get the benefit to each other due by the adjoining or close location to
each other.

Basically agglomeration can be defined as a spatial concentration of economic activities in

urban area due by the economies of proximity associated with the spatial cluster of
companies, workers and consumers (Kuncoro, 2002). The advantages of spatial concentration
as a result of the economic scale is called as the agglomeration economies. The uneven
distribution resources lead to disparity in the rate of economic growth between regions.
Inequalities of resources is reflected in the concentration of economic activities that occurs
in certain area only. Thus, the area of concentration of economic program where it get a lot
of benefit from it called agglomeration economies (Didi Nuryadin & Jamzam Sodik, 2007). It
is also similar definition as per stated by Bradley and Gans (1996) which the agglomeration
economies are externality that resulted from the geographical proximity of economic
activities. Montgomery (2002) noted that the agglomeration is the spatial concentration of
economic program in urban areas because of the entrenchment due to nearby location
(economies proximity) associated with spatial cluster of business like companies, workers and

Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

Furthermore, the agglomeration economies able to contribute a positive influence on the rate
of economic growth as the consequences of the regions where it is included in agglomeration
economies generally have rapid growth of high development growth rate compared to the
regions or area which not agglomerate.

On top of that, the economist like Hoover classifying the agglomeration into 3 classes which
as follows:
i. Large scale of economic which is an advantages that obtained by the companies for
the expansion of the production scale of the company in particular place or area in a
ii. The localization economies which the benefit for all companies in a similar industry in
one location or area in a region.
iii. Urbanization economies which is an advantages for all industries at the same location
as a consequences of enlargement of economic scale (population, income, output, or
prosperity) of the location.

But there is other classification by the other economist like O Sullivan (1996) which classified
the agglomeration economies into 2 types of agglomeration economies of localization and
urbanization economies.

Other than that we also can identify the existing of the agglomeration economies by the
increased industrial competition, the efficient operation or implementation of industries,
increased of industrial productivity with a good quality of product, ease of management and
control in human resources and efficient distribution with providing the sustainable industrial

Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

1.2 Agglomeration theory

There are several types of theories of agglomeration which as follows: -

i) Neo-classical theory
The contribution of neo-classical theory is the introduction of agglomeration economies by
arguing that agglomeration arise from the behaviour and action of economic player in fining
the agglomeration advantages such as economies of localization and economies urbanization.
This theory prove that the existence of systematic interaction between economic player who
are alike or who have the same goals and needs; is it between the companies in the same
industry or the companies in the different industry or individual. The method used in this
theory is the constant return to scale and perfect competition. However according to Krugman
(1998), the limitation of neo classical theory is to see that the external economy which
encourages agglomeration is still to be considered as a mystery (black box). Besides Neo-
classical urban system is non-spatial that only describe the numbers and type of town but not
indicate its location.

ii) Dynamic externalities theory

The theory believe that geographical proximity facilities the transmission idea, so the
technologies transfer is important to the city. This theory is based on the theory advanced by
Marshall Arrow Romer (MAR), Porter and Jacob. All of them tried to explain the
simultaneously how to create or form the city and why the city growth.

Furthermore, dynamic externalities theory by MAR version emphasizing the important of

knowledge transfer (knowledge spillover) between companies in the industry, which can be
obtained by ongoing communication between local companies in the same industry.
According to MAR, local monopoly is better than the local competition because local
monopolies impede the ideas flow from other industries and externalities that internalized
by the innovator. However Porter stated that the transfer of knowledge and industrial
geographically will drive the growth he also stressed that the local competition is more
important to accelerate the innovation adoption.

Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

The diversity of industries in urban area also provide the opportunities for each industrial
players or companies to interact, make a modification and duplication, as well as updated to
other companies either in the same or different sectors. Other than that, specialization in the
company within the diverse industry in urban area make their interdependence and generate
benefit for all parties in the region.

iii) The new economic geography

The new economic geography attempt to reduce the effect of agglomeration of the
interaction between the size of market, transportation costs and increasing the return to the
company. In this case, the agglomeration economies are not assumed, but derived from the
interaction of economies of scale at the firm level, the cost of transportation and the factor
of mobility production.

This theory also emphasize on the circular causality mechanism to explain the spatial
concentration of economic activities. In the model, the centripetal force comes from the
variation or diversity intermediate consumption of good on the production side. The
centrifugal forces derived from the pressure which is owned by the geographic concentration
of local input market that offer higher price and wide spread demand. It the transportation
cost is low, the agglomeration will occur.

In the model technological externalities, knowledge transferred between companies provide

incentives for agglomeration of economic activities. Information will be treated as a public
good, in other word, there is no competition to reach it. The diffusion of this information later
will generate benefit for each companies. By assuming that each companies produce different
information, the benefit of interaction will increase by the numbers if companies. So, due to
the interaction are informal, the expansion of the information exchange will decrease by
increasing of distance. This situation will make all companies to be located closer to each
other and produce agglomeration.

Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

iv) Growth pole theory

This theory was popularized by Perroux and become the basis of regional industrial
development policies strategies that implemented widely in various countries today.
According to Perroux, growth does not appear in various regions in the same time. The growth
occurs only in the same place called central growth with difference intensity.

This theory promoting the idea as follow:

a) In the development process, there will emerge the featured industry which is the
major driver in the regional development. So, when they link to each other closely,
the development of featured industry will influence the other industry development
especially for those who are linked closely to the companies within the core industrial
area or region.
b) Industrial concentration in the region will accelerate the growth of economy because
the industrial concentration will create different consumption pattern between
regions which make the industrial development of one region will influence or give
some impact to other region.
c) Economy is the combination of a relatively active industrial system (featured industry)
with a relatively passive industry is the industry that depend on the featured industry
or the central growth. The relatively active or developed region will influence the
relatively passive region.

Furthermore Perroux stated that in term of location, the economy development in the region
is uneven and tend to create agglomeration process. Then that particular developed region
will influence other region with slow rate of development. The occurrence of these
agglomerations have certain benefits that economically featured (businesses in large
numbers) and cost saving advantages. (Lincolin, 1999)

Scenario of Economic Agglomeration in Kuantan, Pahang

UDM 750: Urban Economics and Finance

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