194 QUARTERLY JOURNAL OF ECONOMICS Our hypothesis asserts that United States producers are likely to be the first to spy an opportunity for high-income or labor-saving new products.7 But it goes on to assert that the first producing facilities for such products will be located in the United States.This is not a self-evident proposition.Under the calculus of least cost, production need not automatically take place at a location close to the market,unless the product can be produced and delivered from that location at lowest cost.Besides,now that most major United States companies control facilities situated in one or more locations outside of the United States,the possibility of considering a non- United States location is even more plausible than it might once have been. Of course,if prospective producers were to make their loca- tional choices on the basis of least-cost considerations,the United States would not always be ruled out.The costs of international transport and United States import duties,for instance,might be so high as to argue for such a location.My guess is,however,that the early producers of a new product intended for the United States market are attracted to a United States location by forces which are far stronger than relative factor-cost and transport considera- tions.For the reasoning on this point,one has to take a long detour away from comparative cost analysis into areas which fall under the rubrics of communication and external economies. By now,a considerable amount of empirical work has been done on the factors affecting the location of industry.8 Many of these studies try to explain observed locational patterns in conven- tional cost-minimizing terms,by implicit or explicit reference to labor cost and transportation cost.But some explicitly introduce problems of communication and external economies as powerful locational forces.These factors were given special emphasis in the analyses which were a part of the New York Metropolitan Region Study of the 1950's.At the risk of oversimplifying,I shall try to summarize what these studies suggested. some in this paper;but he was not aware of my writings nor I of his until after both had been completed. 7.There is a kind of first-cousin relationship between this simple notion and the "entrained want"concept defined by H.G.Barnett in Innovation: The Basis of Cultural Change (New York:McGraw-Hill,1953)p.148.Albert O.Hirschman,The Strategy of Economic Development (New Haven:Yale University Press,1958),p.68,also finds the concept helpful in his effort to explain certain aspects of economic development. 8.For a summary of such work,together with a useful bibliography,see John Meyer, "Regional Economics:A Survey,"in the American Economic Review,LIII (Mar.1963),19-54. 9.The points that follow are dealt with at length in the following pub- lications:Raymond Vernon,Metropolis,1986 (Cambridge:Harvard Uni-
194 QUARTERLY JOURNAL OF ECONOMICS Our hypothesis asserts that United States producers are likely to be the first to spy an opportunity for high-income or labor-saving new products.* But it goes on to assert that the first producing facilities for such products will be located in the United States. This is not a self-evident proposition. Under the calculus of least cost, production need not automatically take place at a location close to the market, unless the product can be produced and delivered from that location at lowest cost. Besides, now that most major United States companies control facilities situated in one or more locations outside of the United States, the possibility of considering a nonUnited States location is even more plausible than it might once have been. Of course, if prospective producers were to make their locational choices on the basis of least-cost considerations, the United States would not always be ruled out. The costs of international transport and United States import duties, for instance, might be so high as to argue for such a location. My guess is, however, that the early producers of a new product intended for the United States market are attracted to a United States location by forces which are far stronger than relative factor-cost and transport considerations. For the reasoning on this point, one has to take a long detour away from comparative cost analysis into areas which fall under the rubrics of communication and external economies. By now, a considerable amount of empirical work has been done on the factors affecting the location of ind~stry.~Many of these studies try to explain observed locational patterns in conventional cost-minimizing terms, by implicit or explicit reference to labor cost and transportation cost. But some explicitly introduce problems of communication and external economies as powerful locational forces. These factors were given special emphasis in the analyses which were a part of the New York Metropolitan Region Study of the 1950's. At the risk of oversimplifying, I shall try to summarize what these studies suggested? some in this paper; but he was not aware of my writings nor I of his until after both had been completed. 7. There is a kind of first-cousin relationship between this simple notion and the "entrained want" concept defined by H. G. Barnett in Innovation: The Basis of Cultural Change (New York: McGraw-Hill, 1953) p. 148. Albert 0.Hirschman, The Strategy of Economic Development (New Haven: Yale University Press, 1958), p. 68, also finds the concept helpful in his effort to explain certain aspects of economic development. 8. For a summary of such work, together with a useful bibliography, see John Meyer, "Regional Economics: A Survey," in the American Economic Review, LIII (Mar. 1963), 19-54. 9. The points that follow are dealt with at length in the following publications: Raymond Vernon, Metropolis, 1986 (Cambridge: Harvard Uni-
INVESTMENT AND TRADE 195 In the early stages of introduction of a new product,producers were usually confronted with a number of critical,albeit transitory, conditions.For one thing,the product itself may be quite unstand- ardized for a time;its inputs,its processing,and its final specifica- tions may cover a wide range.Contrast the great variety of auto- mobiles produced and marketed before 1910 with the thoroughly standardized product of the 1930's,or the variegated radio designs of the 1920's with the uniform models of the 1930's.The unstand- ardized nature of the design at this early stage carries with it a number of locational implications. First,producers at this stage are particularly concerned with the degree of freedom they have in changing their inputs.Of course, the cost of the inputs is also relevant.But as long as the nature of these inputs cannot be fixed in advance with assurance,the calcula- tion of cost must take into account the general need for flexibility in any locational choice.1 Second,the price elasticity of demand for the output of individ- ual firms is comparatively low.This follows from the high degree of production differentiation,or the existence of monopoly in the early stages.2 One result is,of course,that small cost differences count less in the calculations of the entrepreneur than they are likely to count later on. Third,the need for swift and effective communication on the part of the producer with customers,suppliers,and even competi- tors is especially high at this stage.This is a corollary of the fact that a considerable amount of uncertainty remains regarding the ultimate dimensions of the market,the efforts of rivals to preempt that market,the specifications of the inputs needed for production, and the specifications of the products likely to be most successful in the effort. All of these considerations tend to argue for a location in which communication between the market and the executives directly con- cerned with the new product is swift and easy,and in which a wide versity Press,1960),pp.38-85;Max Hall (ed.),Made in New York (Cam- bridge:Harvard University Press,1959),pp.3-18,19 passim;Robert M. Lichtenberg,One-Tenth of a Nation (Cambridge:Harvard University Press, 1960),pp.31-70. 1.This is,of course,a familiar point elaborated in George F.Stigler, "Production and Distribution in the Short Run,"Journal of Polilical Econ- omy,XLVII (June 1939),305,et seq. 2.Hufbauer,op.cit.,suggests that the low price elasticity of demand in the first gtage may be due simply to the fact that the first market may be a "captive market"unresponsive to price changes;but that later,in order to expand the use of the new product,other markets may be brought in which are more price responsive
INVESTMENT AND TRADE 195 In the early stages of introduction of a new product, producers were usually confronted with a number of critical, albeit transitory, conditions. For one thing, the product itself may be quite unstandardized for a time; its inputs, its processing, and its final specifications may cover a wide range. Contrast the great variety of automobiles produced and marketed before 1910 with the thoroughly standardized product of the 1930's, or the variegated radio designs of the 1920's with the uniform models of the 1930's. The unstandardized nature of the design at this early stage carries with it a number of locational implications. First, producers at this stage are particularly concerned with the degree of freedom they have in changing their inputs. Of course, the cost of the inputs is also relevant. But as long as the nature of these inputs cannot be fixed in advance with assurance, the calculation of cost must take into account the general need for flexibility in any locational ch0ice.l Second, the price elasticity of demand for the output of individual firms is comparatively low. This follows from the high degree of production differentiation, or the existence of monopoly in the early stage^.^ One result is, of course, that small cost differences count less in the calculations of the entrepreneur than they are likely to count later on. Third, the need for swift and effective communication on the part of the producer with customers, suppliers, and even competitors is especially high at this stage. This is a corollary of the fact that a considerable amount of uncertainty remains regarding the ultimate dimensions of the market, the efforts of rivals to preempt that market, the specifications of the inputs needed for production, and the specifications of the products likely to be most successful in the effort. All of these considerations tend to argue for a location in which communication between the market and the executives directly concerned with the new product is swift and easy, and in which a wide venity Press, lW), pp. 38-85; Max Hall (ed.), Made in New York (Cam- bridge: Harvard University Press, 1959), p?. 3-18, 19 passim; Robert M. Lichtenberg, One-Tenth of a Nation (Cambridge: Harvard University Press, lW), pp. 31-70. 1. This is, of course, a familiar point elaborated in George F. Stigler, "Production and Distribution in the Short Run," Jouml of Political Economy, XLVII (June 1939), 305, et seq. 2. Hufbauer, op. cit., suggests that the low price elasticity of demand in the first stage may be due simply to the fact that the first market may be a "captive market" unresponsive to price changes; but that later, in order to expand the yse of the-new product, other marketa may be brought in which are more pnce responmve