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loCatIon oF CapaCIty 147

each other, and even in an increasingly globalised world being close helps. Combine this
with good regulation and free markets and it becomes a significant competitive advantage.
High-tech industries provide one of the most famous location clusters in the area south of
San Francisco, known as Silicon Valley – probably the most important intellectual and com-
mercial hub of technological innovation. Yet other locations are developing. For example,
Bangalore in India is fast becoming a cluster for the computer industry because of the ready
availability of well-educated, low-cost, English-speaking software technicians; it has now
attracted more and more sophisticated business. Something similar is happening in Shanghai
in China. ‘Over the next ten years, China will become a ferociously formidable competitor for compa-
nies that run the entire length of the technology food chain’, says Michael J. Moritz, a Californian
venture-capital firm. Even in higher-cost countries, new clusters are growing. One is around
‘silicon roundabout’, in East London, where old Victorian warehouses are home to a growing
number of Web and technology start-ups, working on everything from online game design to
streaming music services and general Web services (Google has offices there). The history of
start-ups in the area stretches back a couple of decades because of relatively low office rents,
a creative atmosphere generated by an influx of artists and designers, London’s world-class
universities, art galleries and the kind of cafés, bars, shops and clubs that help attract creative
staff. So, again, the cluster developed for clear reasons then grew because size and focus attracts
other companies.
Racing cars are mostly made in Britain – in particular in the area around Oxfordshire or
Northamptonshire. Most Formula 1 teams are based in Britain, as are many Indy Car teams.
Even those who are not are likely to use British services. Motorsport is a flourishing cluster, with
around 4,500 firms working at building, maintaining, modifying and restoring cars, making
engines and components and providing technical and management services. Almost every-
thing a racing team needs can be found without leaving the area.

Resource costs – labour
Although wages and the other costs of employing people can vary between differ-
ent areas in any country, it is more likely to be a significant factor when interna-
tional comparisons are made. Here, wage costs mean those costs to the organisation
of paying wages directly to individual employees. Non-wage costs are the employ-
ment taxes, social security costs, holiday payments, and other welfare provisions that
the organisation has to make in order to employ people. However, such labour costs
should be treated with some caution. Two factors can influence them. The first is
the productivity of labour. On an international level this is often inversely related
to labour costs. This means that, generally, the average amount produced by each
individual employed in a given unit of time is greater in countries with higher labour
costs. This is, at least partly, because in countries with high labour costs there is more
incentive to invest in productivity-enhancing technology. This effect goes some way
to offsetting the large international variations in labour costs. The second factor is
the rate of exchange of countries’ currencies that may swing considerably over time.
This, in turn, changes relative labour costs. Yet, in spite of these adjustments to the
real value of relative labour costs, they may exert a major influence on the location
decision, especially in industries such as clothing, where labour costs are a high pro-
portion of total costs.

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