Lesson 1: Take advantage of location

Shultz (1953) proposed the hypothesis that rural industry develops most vigorously near an urban-industrial nexus-either on the pert-urban fringes of major cities or within a 25 to 18 30 mile radius of major economic centers. This has since been verified through empirical work in a number of countries, for example Brazil (Nicholls et al, 1969) and China (Benziger, 1996). Cities are a source of markets for rural products and of ideas that diffuse out into the surrounding countryside. They can provide alternative employment possibilities for rural residents, who are prepared to commute to urban industries and businesses. For example, commuter employment is widely observed near China's coastal cities, enabling agricultural households to diversify income sources and enlarge total 19 20 earnings. Commuting in turn, gives rise to multiplier effects in the local rural economy.

In addition, the city provides a lucrative market for high-value food items such as fruit and vegetables. Beyond that, urban demand stimulates the spread of processing activities, packaging industries, refrigerated storage facilities, delivery companies, and a wide range of ancillary industries. Spillover benefits from cities can trigger rural manufacturing activities, which capitalize on lower overhead costs and the elastic supply of labor. Research suggests that enterprise productivity is higher for medium-size firms than for firms hiring only one or two workers. In addition, productivity is greater for firms located near larger towns and cities (Lanjouw and Lanjouw 1994). The most important spillover benefits are:

· The quality of transport infrastructure around cities, communications facilities, electricity, and municipal services,

· subcontracting arrangements with urban industries, technical assistance for setting up and maintaining production lines. Assistance can be part of sub-contracting linkages, but the experience of the region around Shanghai indicates that the flow of engineers and technicians from the city to the surrounding countryside was crucial to the transfer of technology and production skills. Thus the fusing of local entrepreneurship with access to urban engineering expertise enabled countries in Southern Jiangsu and Zhejiang to develop sophisticated rural industry (see Ho 1994).

· supply of credit from formal and informal banking and other financial institutions which are more numerous in and around cities,

· Market access. Geographical closeness plays a part, and cities also sustain an infrastructure of distribution services that can handle marketing for rural producers. In other words, the availability of specialized services lessens the risks for manufacturers and eases market entry. For instance, marketing services 21 provided by Hong Kong-based firms have enabled thousands of rural enterprises in nearby Guangdong province of China to sell their products in the Hong Kong markets and throughout the world. Hong Kong was a source of capital and producer services that initiated manufacturing activities. In addition, Hong Kong provided essential banking, brokerage, marketing, insurance, transport, and repair services. Without this package-ready-assembled and tested-Chinese producers would have experienced a far more protracted learning spell. Quite possibly, they may not have succeeded.

· Cities have more and better schools and training facilities, and as a result the local labor market offers a higher and more diverse range of skills. To succeed, rural industry must adopt modern technology and meet acceptable quality standards. Technology absorption is mediated by the labor market, and cities are much better endowed with the skilled workers needed for running modern production establishments.

· Finally, cities are a prolific source of ideas and entrepreneurship, which can spark rural industry. Through casual or business contacts, non-farmers transfer ideas about industrial options to the rural sector. This process is visible in China and in Taiwan (China). Interaction between urban and nearby rural counties was instrumental in diffusing industry around many of the urban centers along China's eastern seaboard. Likewise, the belt of rural industry beyond Taipei and Kaoshiung reflects the train of industrial ideas that filtered from the cities to the countryside along pathways created by agricultural processing and subcontracting. In addition, the regional neighborhood matters a great deal. Proximity to a mid-sized or large city may not be sufficient for rural industrialization if the city is relatively isolated from other economically dynamic regions. Cross-country analysis suggests that the contagion effect of growth in neighboring countries can be a powerful stimulus and, likewise, sluggish neighbors can put a brake on development (see Easterly and Levine 1995).