Network Externalities In Action

From the Beeb (excerpt):

The sweet sound of success

It is an amazing story of survival - a parable of how small businesses can use the old ways to make money, but then adapt and prosper down the generations.

Today, the quiet town of Markneukirchen, nestling in the mountains of eastern Germany near the Czech border, would be called an "economic cluster", a place where different companies combine in a close-knit single industry.

But when tradesman started making musical instruments in the town nearly four centuries ago, there was no fancy term for the way they were organised.

It was just the way they did things: violin-makers set up near manufacturers of bows, while the trombone workshop relied on the mouthpiece maker just up the street.

Today, the town and the valley around it have 113 different enterprises, all involved in making musical instruments. They rely on traditional methods, but utilise all the modern ways of connecting with far-away markets.

Everybody you talk to in the town has a story about how they learnt their particular trade - whether it be making a clarinet or a mandolin or a horn - from their father or uncle, nearly always a male member of the previous generation. They talk of the importance of learning properly by getting their hands dirty.

This town's remarkable phenomenon started in the 17th Century when a group of Protestants fled across the border from religious persecution in Bohemia.

Among them was a group of instrument makers who settled in Markneukirchen.

By the 1900s, 80% of the world's musical instruments were made in the town...

Anyone who’s been to the textile shops along Jalan TAR in KL or the electronic shops off Jalan Pasar will recognise the similarities. Despite the fact that close proximity invites stiffer competition and margin compression, a critical mass of of stores selling the same type of goods, or companies producing similar goods, invites enough positive complementary to offset any potential los of sales – for example, the supply of specialised labour or raw materials, or how customers associate a particular area or region with certain industries or products (Satay Kajang, anyone?).

Can this type of unplanned and organic agglomeration be harnessed for the cause of development? It’s certainly being tried here in Malaysia – Iskandar’s five flagship zones in Johor for instance, and the MSC closer to the Klang Valley.

Long term, the success of these and other efforts would depend not only on the ability of the companies located there to compete, but also the build-up of ancillary products and services to support them.