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The Evolution of a New Industrial District:
The Automobile Industry in the American Southeast

by Stephan Weiler
Associate Professor of Economics
Department of Economics, Colorado State University, Fort Collins, CO 80523
Stephan.Weiler@ColoState.edu

Eric Thompson
Assistant Professor of Economics
Department of Economics, University of Kentucky, Lexington, KY 40506
ecthom1@pop.uky.edu

and

Terutomo Ozawa
Professor of Economics
Department of Economics, Colorado State University, Fort Collins, CO 80523
T.Ozawa@ColoState.edu

ABSTRACT

The emergence of the southeastern United States as a shared region by global automakers demonstrates the organic development of a new industrial district. Initial core pioneers in such districts tend to develop crucial supplier networks around them, leading to possible upstream cooperation for otherwise competitive downstream assemblers. Empirical evidence suggests that a core plant will spark the formation of a sharable supply network, differentiated by criticalness of parts, distance from plant, and timing of establishment. However, these links may result in skewed private and public incentives, which are modeled in a game-theoretic framework. If left to market solutions, unusual yet potentially significant intra- and inter-regional market failures may emerge, leading to potential justification for planning intervention.


 

I. Introduction

A rough subset of southeastern American states, often know as "Dixie", as former components of the Confederacy, has recently emerged as a new host region for automakers, both domestic and foreign. General Motors (GM) has long been operating a truck plant in Tennessee and a car plant in Kentucky. In 1983, the first foreign entry was made by Nissan (Japan) when it established an assembly plant in Symna, Tennessee to produce both trucks and passenger cars. Soon afterward, in 1988, Nissan's archrival, Toyota (Japan) moved into Georgetown, Kentucky, similarly to produce vehicles locally. In 1990, the Saturn plant, a brand-new division of GM, was also set up in Spring Hill, Tennessee.

More recently, a group of German automakers were attracted to the South as a direct investment site. BMW was the first German firm to build a plant, in Spartanburg, South Carolina in 1995; followed quickly by Mercedes-Benz's decision to do the same in Vance, Alabama in February 1997, a plant now owned by Daimler-Chrysler. Volkswagen, which once operated a plant in Pennsylvania but withdrew in the early 1980's, is now contemplating its return to the U.S., specifically the South. Most recently, Honda announced the construction of a new plant in Alabama to be completed by 2002. All these moves by the world's major automakers point to the surprising attractiveness of the southeast as an entirely new location for U.S. automobile production. The region is in fact emerging as a favored automobile district over the Detroit area, America's traditional home for car manufacturing.

This paper explores the reasons for the development of such a new industrial district, then conceptualizes and empirically tests the characteristics of this process in the American southeast. The current paper represents a specific case study of previous broader econometric findings, focusing in particular on the implications of such districts for market versus planned outcomes. This paper's combination of empirical findings, which assesses the clustering process around the Kentucky Toyota plant, with game-theoretic analyses highlighting the private firm and public agent decision dynamics, provides insights into the opportunities and challenges of evolving industrial districts.

Empirical evidence shows the clear formation of a sharable supplier network around Toyota in Kentucky. The establishment of a core plant sparked a network of dozens of suppliers, with potential positive spillovers to following carmakers. In addition, such clustering may lead to substantial benefits for the focal local economies (Fujita & Hill, 1995). Given this unusual situation, we consider the pitfalls of private and public incentives in the context of the resultant inter-and intra-regional dynamics through explicit game-theoretic modeling. Significant distortions of both business and government investment patterns may emerge through market outcomes. Associated market failures could create justifications for planning.

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