Firms are often set up close to each other in order to take advantage of?

Analyze the question The question asks why firms locate close to each other (clustering). This is about the localisation of industry and the benefits that come from it.

Explain the concept

• Internal economies of scale are cost savings that come from a single firm growing larger, such as bulk buying or specialised management. They have nothing to do with where other firms are located.
• External economies of scale are cost savings that benefit all firms in an industry because the industry is concentrated in one area. Examples are a shared pool of skilled labour, nearby suppliers, better roads and infrastructure, and specialised support services such as banks and repair services. Examples in Nigeria include Aba (leather and garments), Nnewi (auto parts), Ikeja and Ota (industrial estates), and Kano (textiles and leather).
• Agglomeration economies is a closely related term. It refers to the benefits of firms and people clustering together, and it is often treated as a similar idea to external economies in urban and regional economics.

Solution

1. Firms set up close to each other to reduce costs.
2. The cost advantages come from the clustering itself, not from the size of any single firm. This rules out C.
3. Skilled labour (A) is only one example of the benefits, so it is too narrow.
4. That leaves B and D. Agglomeration economies is a valid and closely related term. However, in the standard Nigerian economics syllabus (JAMB, WASSCE), the textbook treatment of the localisation of industry presents the advantages of firms clustering as external economies of scale.

Note on B vs D: Agglomeration economies is a legitimate alternative, so I would say the question is somewhat ambiguous.

Answer: D. External economies of scale

Exam tip: Remember it this way:

• Internal = inside one firm (its own size).
• External = outside the firm, from the industry or location (clustering, shared infrastructure, skilled labour pool).

If the question mentions firms located together or the industry growing, think external.