The role of urban economies in driving economic growth in developing and transition countries is often overlooked. Links formed among businesses operating within the same town or city can contribute towards increased economic activity. Policies should be developed to encourage such effects.

Research from Newcastle University in the UK examines whether linkages among urban industrial firms in transition economies can increase economic growth. The research focuses on Yerevan, the largest city and capital of Armenia (a former republic of the Soviet Union).

Cities can drive economic growth in developing and transition countries because they generate ‘agglomeration effects’ – benefits resulting from certain types of economic activity being more productive when undertaken in urban locations. These scale economies occur where the geographical concentration of industries leads to certain advantages and savings. Where producers are concentrated, they are more likely to have access to a supply of suitable inputs (backward linkages) and a market for the intermediate goods – partially finished goods or raw materials – they produce (forward linkages). These linkages can lead to ‘agglomeration effects’ and urban growth.

Yerevan was an important manufacturing centre in the Soviet era, but industrial activity fell dramatically following the collapse of the Soviet Union.  Soviet economic policy prevented the formation of linkages because, firstly, scale economies were internalised in large, vertically integrated firms and, secondly, inputs and markets were located in other republics at great distances from Yerevan. There were consequently few linkages among the city’s industrial firms.

To assess the current state of linkages among industrial firms in Yerevan the researcher surveyed 121 businesses in 2003. The survey asked whether linkages exist and correlated the findings with industrial production statistics for various industry groups. Barriers to increased production and the generation of further linkages were also analysed.

The research finds that:

• linkages have begun to form among industrial firms in Yerevan’s post-Soviet economy
• 30 percent of the businesses surveyed use locally produced semi-finished inputs and 38 percent produced intermediate goods for further use in the Armenian economy
• in three industries – metals, machinery and electrics – robust forward and backward linkages have formed
• these emerging linkages are associated with production growth: six of the seven industry groups producing the highest amount of intermediate goods for local firms showed growth.
• locally produced intermediate goods were sometimes not used either because they were absent or, where they did exist, because their quality was often poor
• barriers to growth included tax policy and administration, lack of demand and lack of capital.

Linkages among Yerevan’s industrial companies do exist and statistics show they are associated with growth in industrial output in the Armenian economy. Policies to strengthen and deepen these linkages should be encouraged. The researcher highlights several actions the Armenian government and donors could take:

• Effective tax policy and administration reform.
• A vigorous programme of export promotion to help address the problem of weak demand.
• Programmes to help businesses improve their access to capital and update their technology.
• Similar research in other post-socialist cities would improve understanding of barriers to the use of local products.

Source(s):
‘Industrial Firm Linkages in a Post-Soviet Urban Economy: Implications for Development Policy and Programmes’, Progress in Development Studies 6.3, pages 224-241, by R Jerome Anderson, 2006

id21 Research Highlight: 30 March 2007

Further Information:
R Jerome Anderson
School of Architecture, Planning and Landscape
University of Newcastle upon Tyne
Newcastle upon Tyne NE1 7RU
UK

Tel: +44 (0) 191 222 5831
Fax: +44 (0) 191 222 6115
Contact the contributor: r.j.anderson@ncl.ac.uk

School of Architecture, Planning and Landscape, University of Newcastle upon Tyne, UK

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