Literature Review on

Informal Industrial Agglomeration

[Course Code: G101-Introduction to Economic Geography and Environment]

Submitted to

Dr. M. Maksudur Rahman

Professor

Department of Geography & Environment

University of Dhaka

Submitted by

Group 2, Section B
Name Roll
BBA 30, IBA

Name Roll Rahib Mabsur Chowdhury 54

Khaled Imran Khan 04 Azman Munir 64

Adiba Mustafa Tanisha 14 Nazia Afrin Anita 74

Md. Mushfiqur Rahman 24 Farhan Sadik 84

Nusaiba Naim 34 Mashayekh Al Mashriquee 94

Tasnima Jannat 44 Mashrafi Rahman Tasin 104

Date of Submission: February 27, 2023.

IBA, University of Dhaka.

 Literature Review

Informal industrial agglomeration is the spatial clustering of small-scale and

unregistered enterprises specialised in a particular industry in a specific geographical area.
These enterprises often operate in the informal economy1 and are characterised by a lack of
formal contracts, legal recognition, and protection (Roy, 2003). A number of research studies
have explored the effects of informal industrial agglomeration on key economic indicators
such as job creation, poverty reduction, and overall economic growth. These research projects
seek to better understand the potential benefits of informal industrial agglomeration,
particularly in developing countries where such clusters are prevalent. This literature review
aims to identify the key gaps in understanding the subject of informal industrial
agglomeration and to analyse the current state of knowledge, summarising the important
findings from several studies on it.

Understanding Informal Industrial Agglomeration

Informal industries are characterised by economic activities conducted outside of
formal regulatory frameworks in terms of employment, working conditions, and access to
credit and public services. These agglomerations often develop spontaneously and without
formal planning, driven by market forces and the need for access to resources and markets.
However, Mukim (2011) found that this informal economy is a significant source of income
for millions of people in developing countries, as it provides opportunities for workers from
poor and marginalised communities to earn a living.
The important aspect of informal industrial agglomeration is the relationship between these
clusters and the broader urban economy. These clusters can contribute to economic growth
and employment generation by providing goods and services to local markets and beyond. On
the other hand, they may also contribute to environmental degradation, congestion, and other
negative externalities, particularly if they are not adequately regulated or integrated into
broader urban planning frameworks (Nadvi, 2004).
Overall, understanding informal industrial agglomeration requires a holistic perspective that
considers the social, economic, and environmental dimensions of these clusters.

1
The informal economy consists of activities that have market value but are not formally registered.

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Identifying Key Drivers of Industrial Clustering
The location of informal industrial agglomerations is influenced by a complex range
of factors related to geography, resources, labour, history, and networks. Mukim, (2011)
attempted to understand what drives the process of spatial variations in industrial activity in
India, i.e. in identifying the factors that determine location decisions. For countries like India,
economic geography2 factors have an important effect on informal firms’ performance, and
thus their decision to locate in a particular area. But in another paper, for countries like China,
their policy of developing the east first has led to industrial agglomerations that are
concentrated in the eastern region (Zhang et al., 2022). In another paper, Wang et al. (2010)
explores the informal industrial cluster in the electronics industry in Shenzhen, China, using a
case study approach to investigate the drivers and consequences of the agglomeration of the
electronics industry in Shenzhen. The study finds that the agglomeration of the electronics
industry in Shenzhen is driven by a range of factors, including the high cost of compliance
with formal regulations, the need for flexibility and responsiveness in a rapidly changing
market, and the social and cultural norms of the industry. Again, Moulaert et al. (2012)
researched the informal industrial agglomeration of developed countries like the United
States of America in the city of Los Angeles where he found it has emerged as a result of a
combination of economic, social, and cultural factors like- low barriers to entry, flexible
production, cheap labour and dense networks of suppliers, subcontractors, and retailers.
Here, a clear distinction can be seen among the key drivers of the phenomena in low-income,
mid-income and high-income countries. Some of the most mentionable ones are:
Geographical Location
Informal industrial agglomerations are often located close to major urban centres or
transportation hubs, allowing for easy access to markets and customers. For example, the
garment industry in Los Angeles is located close to the downtown area and major
transportation routes, which helps to facilitate access to markets and customers. (Moulaert et
al., 2012)
Access to Resources
Informal industrial agglomerations often require access to specific resources or raw
materials. For example, informal metalworking clusters in India are often located close to
sources of scrap metal and other raw materials, which are essential inputs for their production
processes. (Schmitz, 1999). Gereffi (1999) did not focus on a specific location for informal

2
Economic Geography is the study of how people earn their living, how livelihood systems vary by
area and how economic activities are spatially interrelated and linked.

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industrial agglomerations, but instead examined the apparel commodity chain on a global
scale. The paper argues that the location of these industries is influenced by factors such as
access to raw materials.
Labour availability
The availability of low-cost labour is often a key factor in the location of informal
industrial agglomerations. For example, Hassan et al. (2019) conducted a survey of informal
manufacturing enterprises in Dhaka, Bangladesh, and used spatial analysis3 techniques to
identify clusters of such activities in the city with a focus on the role of lower labour costs in
forming agglomeration. The authors found that informal manufacturing is a key livelihood
strategy for poor urban residents, and that low labour costs are a critical factor in the location
and competitiveness of such enterprises.

Effect of Informal Industrial Agglomeration in the Development of a Country

For the research on the relationship between industrial agglomeration and economic
growth, most scholars believed that industrial agglomeration promotes regional economic
development through the spillover of knowledge and technology, improving labour
productivity, increasing employment opportunities, reducing costs and other reasons.
Informal industrial agglomeration has been found to have both positive and negative effects
on the development of a country.
Positive Aspects
Duranton & Overman (2005) used micro-geographic data to test for the presence of
localization economies, and found that agglomeration can lead to knowledge spillovers,
economies of scale, reduced transaction costs, and improved access to inputs and markets, all
of which can contribute to increased productivity and economic growth. Similarly, in their
study of the computer software industry in India, Acs and Audretsch (2003) find that the
exchange of ideas and knowledge among firms is a key factor driving the success of the
industry. Mhede (2012) found that micro and small, cluster-based furniture manufacturing
firms can contribute to poverty reduction in Tanzania and create employment opportunities,
particularly for low-skilled workers who may otherwise struggle to find work.

3
Spatial Analysis is a set of methods used to interact with a GIS to answer questions, support
decisions, and reveal patterns depending on location.

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Negative Aspects
One of the negative effects of informal industrial agglomeration is the environmental
externalities that can arise from increased pollution and congestion. In their study of
Konabari–Kashimpur, Bangladesh, Hossain & Huggins (2021) found that rapid
industrialization in the Greater Dhaka Region has led to significant environmental
degradation, including air and water pollution, deforestation, and soil erosion. They also
found that agglomeration can lead to low wages and poor working conditions, as firms
compete on the basis of cost rather than quality.

Entrepreneurship in Informal Industrial Agglomeration

While there has been much research on informal industrial agglomeration(IIA) in
general, few researchers have taken “entrepreneurship” in such a setting into consideration
which is why we would like to discuss the existing research and understand the gap.
Entrepreneurship4 in informal industrial agglomeration can lead to the creation of jobs and
income generation, which can have a positive impact on the local economy (Acs et al.,
2009). However, entrepreneurs in IIAs face unique challenges that can inhibit their success.
For example, they may lack access to formal financing, which can limit their ability to invest
in their businesses. Additionally, informal norms and networks can create barriers to entry for
new firms that are not part of the existing social fabric. Moreover, Government policies can
either facilitate or inhibit entrepreneurship in IIAs, depending on their design and
implementation (Portes and Sassen-Koob, 1987). Social networks play a crucial role in the
success of entrepreneurs in IIAs, as they provide access to information, resources, and
customers (Zhu et al., 2019b). They leverage these social networks to gain access to
resources and customers (Portes and Sassen-Koob, 1987).
Despite the potential benefits of entrepreneurship in informal industrial agglomeration, there
are also significant challenges. For example, informal entrepreneurs often face limited access
to formal credit, which can make it difficult to expand their businesses (De Soto, 1989). In
addition, informal entrepreneurs may face legal and regulatory barriers that limit their ability
to compete with formal businesses (World Bank, 2017).
Further research is needed to explore the specific challenges and opportunities faced by
entrepreneurs in different IIAs across the world, as well as the effectiveness of different
policy interventions in promoting entrepreneurship and economic growth in these contexts.

4
Entrepreneurship in Informal Industrial Agglomeration refers to the process of starting and running a
business in a location where informal economic activities cluster together.

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Understanding the factors that contribute to successful entrepreneurship in IIAs can inform
policies and programs aimed at supporting small and medium-sized enterprises, promoting
economic development, and reducing poverty in urban areas.

Labour Involvement in Informal Economy

The informal economy is a significant part of the labour market in many developing
countries, where workers engage in economic activities that are not regulated, taxed, or
protected by the state. It includes both self-employment and wage employment and is often
the only source of income for many households (Chen, 2012). The majority of workers in the
informal economy are self-employed, working in family enterprises, or engaged in
small-scale production and trade (Chen, 2014).
The implications of labour involvement in the informal economy for workers and economies
are complex and often contentious. On the one hand, the informal economy provides a vital
source of employment and income for many workers who would otherwise be unemployed or
underemployed (Chen, 2012). On the other hand, labour involvement in the informal
economy is often associated with low wages, poor working conditions, and limited social
protection (Williams & Windebank, 1998). Informal workers are often excluded from legal
protections and benefits, such as minimum wage laws, social security, and health and safety
regulations (ILO, 2018).
The informal economy is a significant part of the labour market in many developing
countries, where workers engage in economic activities that are not regulated, taxed, or
protected by the state. In this literature review, we tried to explore the concept of labour
involvement in the informal economy and its implications for workers.

Informal Industrial Agglomeration and Bangladesh

Several studies have examined the factors that contribute to the emergence and
growth of informal industrial agglomerations in Bangladesh. Hassan et al. (2020) found that
expansion of industries like garment manufacturing, metal, and brick were highly associated
with proximity to a river; food processing, rubber, and plastics manufacturing industries were
clustered in relation to road proximity. The study aimed to explore the distribution of
manufacturing industries in the area, identify any clustering or agglomeration effects, and
examine the characteristics of the industries present. The methodology of the study involved

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the use of Geographic Information Systems (GIS) and spatial statistical analysis techniques to
analyse the spatial patterns of manufacturing industries in Keraniganj.

The international analysis of industrial agglomeration has helped our investigation of the
industrial agglomeration occurring in Bangladesh. Coagglomeration of informal industries
was found to be prevalent in urban peripheral areas of Bangladesh, particularly in Dhaka, for
example, Jinjira Bazar, Keraniganj. Zinzira, a part of Dhaka near the Buriganga river on the
outskirts of the city, is thought to be the best example of informal industrial agglomeration in
Bangladesh. Over time, iron, brass, manufacturing, automobile, electric equipment, light
engineering, and other industries have naturally gathered in this area because its location
makes it easy to do so. Cost reduction, collaboration among co-existing industries, and
infrastructural and resource benefits are all important reasons for clustering in this location
(Karim, 2023). The majority of workers in these industries are unskilled or semi-skilled, and
they work for long hours for minimal wages. (Hassan et al., 2020).
Talukder and Jahan (2017) conducted a study to identify main barriers to competitiveness and
growth encountered by micro, small, and medium-sized light engineering firms in Zinzira
today. To do this, the researchers conducted qualitative interviews with the business owners,
watched how they ran their businesses, and held validation workshops.The study found that
cultural factors are the main thing holding them back from being competitive and growing,
not a lack of resources as most people think.
Despite their informal status, the SMEs5 in Jinjira Bazar contribute significantly to the
economy of Bangladesh. Although there has been some progress made in studying the
informal industrial agglomeration and fringe areas of Bangladesh, it is not enough to reach a
conclusion. With more research and field work on the causes and effects of informal
industrial agglomeration, entrepreneurial scopes and labour market pooling6, we can figure
out how it applies to Bangladesh. The industrial areas located in urban regions of Bangladesh
differ from the ones studied in previous reports, with differences in terms of location, place,
human-environment interactions, and movement. Given the distinctiveness of areas such as
Jinjira and their significant role in the economy of Bangladesh, they present an opportunity
for research and study.

5
SME refers to the unregistered Small and Medium Enterprises in that geographical location.
6
Labour market pooling refers to a larger pool of workers in an area with a specific set of
specialisation or characteristics that makes it easier for firms to find workers with the characteristics
they need.

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