The Role of Merchant Wholesalers in Industrial Agglomeration Formation

Amy Clasmeier
Graduate Program in Community and Regional Planning, University of Texas a t Austin, Austin, TX 78712

Abstract. This paper explores the importance of merchant wholesalers in the early formation of industrial agglomerations. Merchant wholesalers reduce the size constraint of local markets by extending an entrepreneurs market reach. The merchant wholesale function also facilitates the formation of the division of labor by allowing greater local specialization. Merchant wholesalers are hypothesized t o be part of the complex formation process. In the early stage o f a complexs development, these intermediaries trade-in from outside as local demand warrants. Over time, local wholesale functions unfold. As a complex grows, these wholesalers specialize, creating a range of wholesale operations. The process of merchant wholesaler formation is thought to b e dialectical; prior generations o f technology lay the basis of subsequent merchant wholesale specializations. A model of wholesale evolution i s presented and tested, based on a case study of firms in Austin, Texas.

Key Words: agglomeration, complex, distribution, wholesaling, high-tech, linkages.

HE emergence of new innovative industry complexes has resulted in a growing body of research exploring their causes -and consequences. Three strands of theorizing stand out in the literature. At the interregional level, the seedbed shift hypothesis suggests that product cycle forces and diminished seedbed capacity resulted in a cumulative shift of innovative industries toward the US. Sunbelt. initial branch plant relocation was followed by a process of in-filling which
Annals of the Axmiation of American Ceographwr, 80(3), 1990, pp. 394-417 0 Copyright 1990 by Association of American Geographers

resulted in the creation of new centers of innovation (Norton and Rees 1979). At the metropolitan level, case studies o f innovative regions cite place-specific characteristics as the genesis of new complexes. These factors include personal location decisions (Saxenian 1985;Rogers and Larsen 1984),selective and unduly concentrated levels of federal research and development expenditures (Markusen et al. 1990),and synergismamong various local factors which resulted in a new territorial innovation complex (Stohr 1986). Using a conceptual framework based on product-process characteristics, i have previously argued that local transactions are regulated by ownership imperatives and corporate customs that inhibit or encourage linkage and spinoff formation (Glasmeier 1988).Scott and Storper (1987) contend that occasionally windows of opportunity are opened by an initial spark of industrialization. As news of an innovation spreads, competition evolves between locations until finally a new and dominant agglomeration emerges (Storper and Walker 1989). At the intrametropolitan scale, Scott asserts a production-based explanation for the internal integration of cities (1988).The divisibility o f certain labor processes makes possible vertical disintegration of production. These transactions are either undertaken through internal production or obtained through market exchange. As firms contract out for the separable activities which are more costly if executed within the company, and market transactions replace internal production, geographic infilling occurs. This body of literature operates at three geographic levels in suggesting why industries locate proximately and in exploring the important determinants of expansion in favored locations. The viewpoints are welcome addi-

Merchant Wholesalers tions to our knowledge about agglomeration formation. But with one exception, each account treats the process of city formation in isolation (Clasmeier 1988). Thus the evolution of a new complex has been discussed independently of other cities, and only now are we invited t o look within as opposed to outside complexes for factors that precipitate the expansion of new agglomerations. Theoretical treatments do not identify the locational and organizational conditions that nurture the infancy of a new formation. In this article, I argue that new complex formation must be analyzed and considered from a perspective which, rather than treating individual cities discretely or in isolation, encompasses what 1 will call the city system. Regardless of the original stimuli for a complexs formation, it is the interaction between it and other cities that leads to growth and development over time (Pred 1977). Time and place constraints that regulate the material transformation and transportation of stock represent flows in the system of goods and ultimately result in the evolution of another participant in this city system. Reliance on endogenous development forces (embedded in the vertical disintegration paradigm) ignores relationships between distant markets and newly forming agglomerations, particularly in a complexs formative stages. Frontier locations emerge and ultimately flourish through the intermetropolitantransmission of growth, assisted by intermediaries linking preexisting complexes to newly forming ones. This paper addresses a number of issues that have been only weakly conceptualized or largely ignored in the contemporary literature on industrial agglomeration formation. The first concern revolves around a regions ability to specialize (thus innovate and grow) and i t s dependence on trade. In the early stage of a complexs development, external trade allows firms to specialize beyond what local demand supports. The flow of goods and services is accomplished primarily through direct sales by producing firms and the use of indirect market channels. Because of the tenuous nature of new complexes and limited local demand, indirect channels are the more efficient mechanism to secure needed inputs. Therefore I explore the role of market intermediaries (emphasizing merchant wholesalers) in the expansion of trade among regions and sketch out their locational

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implications. I then turn to a model of regional formation which i s based on the concept o f stock control, viz., one expression of how frontier locations are incorporated into a national system of cities (Meyer 1980). By reasserting trade agent control over stock, the geographic evolution of wholesaling within a city system and a newly emerging agglomeration can be outlined. A realistic appraisal of how stock flows across space and through time requires that we understand the motives behind firms choices of distribution channels. With the rise of the verf tically integrated corporation, the functions o distribution and material acquisition are internalized within the firm. As later sections will elaborate, vertical integration best describes industries in which there are few large sellers and market share i s maintained by superficial product differentiation and extensive marketing and sales functions. As the specific concern i s with centers of new industrial innovation where complexes expand through a process o f new product development, I abandon the overly deterministic framework originally detailed by Chandler (1966; see Porter and Livesay 1971). By linking firm distribution strategies with the geography of metropolitan development, an evolutionary model of agglomeration formation can be articulated which incorporates wholesale trade. The formative stages of an agglomeration rely upon new product development and entrepreneurial initiative. Over time as the complex achievessome success, nonlocal wholesalers trade-in to satisfy periodic and increasingly specialized wants. As an agglomeration grows in size and complexity, specialized wholesalers establish a geographic presence. While local production may be sufficient to satisfy basic material input needs, wholesaling remains strong, particularly for specialized goods. Even with the introduction of large multilocational firms, specific immediate needs are often satisfied through distribution channels. This model is elaborated by examining the evolution of a new high-tech industrial complex, Austin, Texas, first through a historical examination of merchant wholesale evolution in the electronics industry and then via a firm survey which identifies the extent that firms currently use distributors. I conclude with comments on the importance of interregional trade in new agglomeration formation.

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Glasmeier turing firms (ordered by broad SIC [Standard Industrial Classification] categories), 54 percent reported they used a combination of marketing channels which included both their own sales forces and distributors to sell their products and services ("Industry Markets through . . . 1985). Instrument manufacturers have the highest percentage of direct sales to industry (final market) (39 percent), while in electrical and electronics equipment industries, only 13 percent used factory-direct sales (Fig. 1).Of firms which used only one channel, 24 percent indicated they bought factory-direct; 23 percent used distributors. Thus, on a purely numerical basis, it is clear that firms use a variety of channels to distribute their goods and to acquire material inputs. Given costs, time, and service requirements, the use of intermediaries i s expected to increase in the 1990s (Crespedes 1988a). The key to distribution i s the provision of place and time utility. Place utility refers to the satisfaction of demand in i t s immediate location. Time utility measures the satisfaction of wants immediately. Distributors move goods from locations of surplus to areas with deficits. By either anticipating demand and maintaining stock to satisfy immediate unscheduled wants, or by estimating an apparent demand and making provisions to fulfill it, the merchant wholesaler ensures both place and time utility.

The Role of Wholesalers and Firm Marketing Strategies

Definition of Wholesalers
Before proceeding, it is necessary to define wholesaling. Elsewhere I have shown that the wholesaling function can be broken down by scale, industry, and type of transaction (Glasmeier 1989). Borrowing from Vance, wholesaling i s usually defined as "the sale of goods in large lots." The wholesale function denotes transattions by individuals in pursuit of a trade, "rather than simply to satisfy a personal or family need." Further clarification indicates that wholesaling involves "the sales of one entrepreneur to another, intended for resale by the second." Vance concludes, "the purpose rather than the scale is the determinant in these instances" (1 970). This study focuses on full-function merchant wholesalers who take title of goods and accept all ownership risks. They typically buy in large quantities, break bulk, assemble, sort, sell, and deliver. Merchant wholesalers are also sectorally specialized, and they undertake various forms of product adjustment as goods move between the manufacturer and the final customer. These enhanced distributor functions have many names, including kitting (the assembly and pretesting of complex parts), assembly, and value-added distribution. Such services continue to evolve as firms attempt to meet manufacturers' ]IT (Just in Time) inventory requirements. In finishing, testing, making manufacturing adjustments, and packaging, distributors virtually eliminate the receiving firm's need for preassembly inspection. Inputs are scheduled to arrive at the factory in time for immediate insertion o n the assembly line (Johnstonand Lawrence 1988; Graves 1989).

Modern Channel Strategies

In the business literature the selection of a marketing strategy i s termed "channeling." Most marketing literature approaches channel selection from the standpoint of how a firm can best distribute i t s products. For our purposes, this approach i s turned slightly on end to be viewed through the lens of geography and regional development concerns. Thus we are able to answer questions about when and under what circumstances firms use market intermediaries to distribute goods and, by implication, determine what kinds of goods and inputs firms purchase through distributors.

Distributor Usage in Manufacturing

While this article highlights high-tech industries (considered footloose and therefore most likely to use the services of market intermediaries), wholesale distribution channels are commonly used in all manufacturing industry. Industrial distributors comprise approximately 30 percent of the nation's 338,000 merchant wholesalers. In a survey of industrial manufac-

Reasons for Using Indirect Channels

It has often been said that firms can eliminate the middleman, but not the functions per-

Merchant Wholesalers

3 97

Chemical & Allied Products Stone, Clay & Glass Products

Primary Metal Industries Fabricated Metal Products Machinery, except Electrical

80 0%

Electrical & Electronic Equipment Transportation Equipment

Instruments& Related Products Misc. Manufacturing Industries

Figure 1. Percentage of manufacturers using various channels of distribution.

formed (Drucker 1962). Thus while a firm may choose to distribute i t s o w n goods and circumvent the need for indirect channels, it must still break bulk, sort, transport, finance, service, and market i t s products (Cox 1965; Bowersox e t al. 1968). Companies use distributors in lieu of direct sales for many reasons. These include the cost of otherwise maintaining an internal sales force (Crespedes 1988b); the role of adjustment and market access required to implement ]IT (Giunipero and ONeal 1987; Socolovsky 1985); the increasing use of computerized links between manufacturers, wholesalers, a n d final customers (Kastiel 1987; Russell 1985); the increasing segmentation o f markets which span numerous geographic locations (Rayner 1986); the effect of foreign competition invading domestic markets (Kerr 1987); and the need for product-related adjustments to satisfy customer needs (Bertrand 1986; Temin 1985). In addition

t o the established role of wholesalers, these entities are increasingly considered the most efficient and profitable means by which specialized producers can gain access to growing markets.

Channel Strategy Depends on Product

Transaction cost analysis is important in describing the use of vertically integrated versus intermediary marketing channels (Williamson 1981a, b). In this instance, the key i s asset specificity which describes the specialized knowledge built up b y agents distributing a product and the type o f service provided by market intermediaries w h o distribute goods. T h e f channel strategy is a critical decision choice o usually based on the total cost of executing a transaction and the competitive conditions in the market (Magrath and Hardy 1987).

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Clasmeier (Crespedes 1988b). This is particularly true when the cost of maintaining an internal sales force is weighed against other pressing demands on capital such as research and development. Firms often adopt a mixed channel strategy, handling large and steady customers with an internal sales force while less explicit, more variable, and small markets are turned over to distributors. Geography plays a critical role in channel decisions. When markets are expanding geographically (given the preexistence of established wholesale networks), producers place a portion of their output with market intermediaries to meet the needs of newly emerging centers of demand (Davis 1989). Because intermediaries have asset-specific knowledge of individual geographic and sectoral markets, they are the most effective means of addressing the needs of new users and distant markets. Persistence of wholesale links derives not only from product characteristics but also from the combined benefits of future sales of new product introductions. Having outlined aspects of firm marketing strategies, I now discuss the role of market intermediaries in the development of regions.

Channel strategy has traditionally depended on the type of product-specialized versus mass-produced (Crespedes 1988a). Intensive distribution (product placed in as many locations as possible) usually occurs with consumer goods. Selective channels cover the goods customers actively seek for specific purposes (e.g., electronic products). Exclusive distribution occurs when a good is in short supply or requires high levels of service and is marketed from a single location. A firm adopts a sales strategy when a good is new and has few readily identifiable customers. As a product matures and users increase, channel adjustments, although costly, are made (Magrath and Hardy 1987). The choice to alter or augment distribution channels depends on the extensiveness of users, the prospect for future market segmentation, increasing market competition, expanding geographic dispersion, and the prerequisite services needed to support a sale. Channel strategy for new products depends on certain imperatives associated with the specific good. The entrepreneur most familiar with the good often markets it to firms which have some likelihood of needing the innovation (Abratt 1986). Later, periodic adjustments in channel strategy are tied t o market success. If the market expands rapidly or if many competitors arise, the producer must seek avenues of distribution beyond the capacity of a single salesperson (Butaney and Wortzel 1988; Vance 1970; Lamont 1972). The most convenient, least costly, and most immediately realized means to market a product is through the use of manufacturers representatives, viz., an external sales force distributing the good along with a number of complementary product lines (Lamont 1972). Alternatively, the entrepreneur may choose to establish an internal sales force by absorbing the costs of developing specialized knowledge of existing markets and competitors. Channel strategies require continual adjustment as markets expand geographically, and large single-customer sales become significant. A critical juncture i s reached when firms must decide whether to maintain an in-house sales force or to expand market-reach through intermediaries. This choice usually depends on a firms cash position (its ability t o employ and reasons for employing i t s own sales force), the product (need for special service), and the extent that the market i s growing geographically

Mercantilism as a Model o f Regional Development

There i s limited geographic literature on the role of wholesaling in the formation of industrial agglomerations (see Vance 1970; Muller 1977; Fredriksson and Lindmark 1979; Meyer 1980; and Lord 1984 for exceptions). Sparse mention stems from two views of industrial complex organization. The first evolves from a historic model of industrialization which presumed that because transportation and communication costs inhibited long distance linkages, producers found jointly in space exchanged goods among themselves (Marshall 1898). The second view focuses on vertically integrated corporations effect on the distribution of material goods. This institutional and organizational development overshadowed interest in the process of material exchange as a separate subject of study; it was simply subsumed within the vertically integrated corporation. Additional geographic inquiries focused on transportation costs and agglomeration economies as explanations for spatial cluster-

Merchant Wholesalers ing. But the former sidestepped the precise transactional nature of the acquisition process, and the latter assumed exchange was between two producers (Weber 1929; Hoover 1948). Because much of geographic inquiry over the last twenty years has been oriented toward underf large multilocational standing the behavior o corporations, it is important that we examine how wholesalers fit into this greater organizational development (Collins and Walker 1974).

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The Rise of the Managerial Corporation

Elsewhere I have written of the historic role of merchants as traders, producers, and conveyors of goods (Glasmeier 1989).* While once dominant in goods production and distribution, the wholesalers role became more circumscribed as new institutions absorbed many of the merchants traditional functions (Porter and Livesay 1971). The diminished importance of wholesaling is frequently tied to the emergence of the vertically integrated corporation and mass markets. With advancements in communications and transportation, corporations could profitably internalize the full range of functions, including distribution. Firms systematized both the acquisition o f needed inputs and the distribution of final product. Product and market factors led to a contraction in wholesaler functions (Chandler 1962; 1966). Wholesalers were bypassed when they were unable to distribute the volume of goods produced by manufacturers, they could not move goods swiftly enough from producer to final market, or they were unable to provide product advertising. Neither were wholesalers used when specialized handling or services were required or when a products distribution necessitated specific capital investmentsto ensure quality at the point of consumption. Finally, wholesalers were often less important in instances when the final product required demonstrable technical knowledge and support both during and after the sales transaction (Porter and Livesay 1971). Chandlers analysis emphasized both supply and demand conditions which encouraged manufacturers t o internalize distribution. He noted that internalization was most prevalent in oligopolistic and concentrated industries. In this instance producers were price setters, and

barriers to entry were high. Therefore market shares were relatively stable. But Chandlers model of firm evolution has been overgeneralized which led to the assumption that all firms grow large and vertically integrate. Also as used, the model is inflexible and ultimately static, unable to account for the mixed distribution stratf many firms. Most importantly, it rules egies o out new industry and firm creation. Chandler correctly described the rise of oligopolistic corporations, but his analysis overlooked the emergence o f new industries and centers of innovation (Jorde and Teece 1989). If the role o f mass producers had eclipsed the need for wholesalers, then their numbers would have surely dwindled. But during the twentieth century, as the national economy has become more specialized, wholesaling units have grown more rapidly than manufacturing establishments (Vance 1970; U.S. Department of Commerce 1982). Even industries most emblematic of mass production and distribution often maintain two sales networks: one to satisfy preexisting concentrations of demand and another to deal with newly emerging markets (Chandler 1966). Finally, in high-tech industries, distributors routinely account for half of all sales (Does the Country Really Need . . . 1985).

Mercantilism as a Counterpoint to Central Place Theory

The dominance of central place theory as a model of urban settlement overpowered early geographic contributions on the subject of wholesaling.* A noted exception is Vances monograph on the merchant in U.S. regional development (1970). His mercantile model was a critique of central place theorys reliance on endogenous change leading t o higher levels of regional specialization. Central place theory could not account for instances where local production was insufficient to satisfy local demand. Nor could it contend with the implications of local specialization and production volumes exceeding local markets. As soon as selfsufficiency was exceeded, labor specialization expanded, leading to growth of trading areas. Industrial specialization was dependent upon trade. By extending demand through geographic expansion, specialization could occur, thus verifying Adam Smiths seminal dictum.

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Glasmeier preciably, firms establish a stocking location to service critical and/or large customers, to accommodate immediate demand fulfillment, and to make final adjustments in products. Wholesalers specialize to establish and maintain high levels of market control. This is an interactive process between the evolution of the complex and the variety of goods available. As a complex strengthens i t s dominance in a single sector, specialized wholesalers are attracted. In very small cities, there i s also occasion for local wholesale stocking t o occur. This type of trade is usually more industry specific and transcends issues of scale. Even the sum of many very small transactions may warrant general stocking of goods. Vance's mercantile model draws considerable validation from historical literature on the settlement of the United States. By rejecting central place theory as rigid, scale-dependent, and economically deterministic, Vance suggests that intermetropolitantrade i s a necessary prerequisite for regional specialization. But his model i s sketched broadly and does not sufficiently elaborate the ways in which frontier locations are integrated into a system of cities.

Time and the Impulse t o Trade

Ignoring the constraints of time and place in modeling demand and immediate fulfillment through supply, a mercantile model of regional development makes explicit the notion of time of demand fulfillment. The wholesaler is responsible for moving goods from a location of abundance to one of scarcity. Thus once trade i s established, demand may accumulate while an agent gauges i t s periodicityand matches this with supply from a variety of sources. The geographic extent of wholesaling depends on the composition of demand which varies by sector, time, and place. A wholesaler can satisfy wants in a small locality by generalizing the goods traded or by specializing in traded goods and expanding hidher market area. Unlike central place theory, which argues that the range of geographic distribution of a good is a function of i t s local population, wholesaling dramatically increases a product's range by delivering a good to the customer. In concentrating on service quality, wholesalers benefit customers by specializing in products and satisfying demand on a more infrequent basis. Therefore, trade occurs across long distances when a customer is willing to satisfy need periodically. The impulse to trade regulates thegeographic extent of wholesalers. A strong impulse results in either long-distance trade or frequent transactions; a weak impulse is characterized either by short linkages or infrequent trade intervals. This matrix of possibilities knits together place and time utility and suggests why and for what types of goods firms use wholesalers (Vance 1970).

Frontier City Integration

Using a framework that focuses on control of exchange and physical distribution, Meyer makes explicit frontier city integration into a national system of cities (1980).Control of exchange is presumed to have three properties. First, per-unit costs to exert control are modest beyond a certain distance. Second, because an entrepreneur can accumulate demand and periodically fill it, considerable economies of scale exist in the purchase of material goods. To secure continued patronage, savings are passed on to customers. Finally, as the space economy evolves, entrepreneurs must either specialize further and extend their geographic trade area or carry a broader range of goods and operate within the same territory. Based on control of exchange, Meyer suggests that trading into frontier locations (as opposed to relocation of the entrepreneur to a region) occurs until "savings in transaction cost/unit gained by proximity exceeds the higher cost/unit of local stocking/production" (1980, 123). Thus, initially, entrepreneurs operate from outside a

Internalization
The evolution of the space economy based on trade is a steady process of internalization. As regions and cities expand, wholesalers compete based on market access and service delivery. At a certain point it becomes necessary for wholesalers to extend their geographic presence into growing markets or risk losing market share to competitors with better service. While original wholesale centers persist, new locations emerge as density of demand warrants. At first the wholesaler may simply establish a sales office to respond to firms' information needs. But eventually if demand expands ap-

Merchant Wholesalers frontier location, only relocating when local demand warrants a stocking l o c a t i ~ n . ~ Control of stock originates in the metropolitan agglomeration closest to the frontier and operates over a large area.6 As demand at the frontier location grows, local generalized stocking (by an outside distributor or a local entrepreneur-distributor) occurs. Meyer notes, more specialized entrepreneurs of the original stocking location will maintain control of the frontier at a higher level of specialization (1980,125). As entrepreneurs seek control over stocking in specific geographic areas, the goods traded must become more generalized and appeal to a broad set of markets. In this instance, stocking of general purpose items may be done by a local wholesaler, and more specialized goods may be stocked outside and sold into the region by a specialized wholesaler. Meyer retreats from the mercantile model because of i t s dependence on wholesalers as the agents of trade. Merchants control over many traditional functions associated with trade (finance, insurance, and transportation) diminished as they evolved either as separate specializations or were absorbed within vertically integrated manufacturing firms. Using the less specific term, entrepreneur, Meyer generalizes the process of integration. In this article, I wish to reassert the importance of wholesalers in the specific context of an expanding space economy within which the number of customers i s increasing rapidly, and the level of complex specialization is high.

40 1

f demand develop, including new ensources o trepreneurs and branch plants. Developments in new technologies force changes in the composition of goods offered by wholesalers, and information about available new inputs expands local opportunities, thereby increasing the potential for local specialization. Modern complexes rarely expand through entrepreneurial growth alone. Branch plants went t o Silicon Valley once the region became known for specialized high-tech goods. Similarly, branch plants were formed as locally owned firms became acquisition targets of firms headquartered outside the region. Branch plant material acquisition channels depend on the historic purchasing patterns of parent firms, intracorporate purchasing policies, and levels of place and time utility. While these establishments may conduct purchasing through inhouse intermediaries, satisfaction of immediate needs and the extent of specialization of goods demanded eventually call forth the use of distributors, particularly when a product incorporates new innovations or is a new innovation itself. In the following two sections the evolutionary model of industrial complex formation through a case study of Austin, Texas i s elaborated. I begin by establishing the historical basis of the industrial complex and the role of wholesalers in the provision of electronic supplies and equipment during a forty-year period. Thus we explore the contemporary importance of wholesalers in the expanding regional economy.

Wholesalers Contribution to New Industrial Complex Formation

Austin, Texas-A Model o f Industrial Complex Formation

In the mid-1970s high-tech industries became the engine of growth for many southern and western U.S. cities. Colorado Springs, Colorado; Austin, Texas; Raleigh-Durham, North Carolina; Boca Raton, Florida; and Phoenix, Arizona are all identified with the 1980s high-tech boom. Austin stands out among similar size cities as having grown rapidly in both population and manufacturing jobs during the last two decades. As branch plants, high-tech consortia, and local start-ups greatly expanded the citys manufacturing base, Austin received national (and eventually international) acclaim as the successor to Silicon Valley.

To articulate the role of wholesalers in new agglomeration formation, we must consider the opposite side of marketings traditional emphasis on sales. I start by making a series of assumptions which begin with the very earliest stages of new agglomeration, viz., when an entrepreneur invents a product which satisfies an unfulfilled need. Demand is nonlocal, and the new product is specialized; few material inputs are purchased (the majority are manufactured in-house). Outside inputs are generally available, and demand can be satisfied by existing wholesalers who carry a broad range of goods and/or can acquire more complex goods by periodically filling demand. Over time other

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Glasmeier With the addition of numerous branch plants in conjunction with the creation o f locally owned firms, Austin has become one of the largest centers for the manufacture of semiconductor devices outside of Silicon Valley. Almost 15 percent of Motorola Inc.s domestic semiconductor employment is now located in Austin. Advanced Micro Devices (AMD) located i t s largest production facility outside Silicon Valley in the city. Cypress Semiconductor has both a production and a design center within the metropolitan area. As high-tech industries were squeezed out of their original locations in the northeastern and western U.S., Austin became the recognized leader in attracting this new employment.

Austin, the capital of Texas and home of the University of Texas, i s located in the south-central part of the state in the Hill Country. State government offices and affiliated agencies cluster in the city,forming the economic base. Many state-sponsored public institutions such as schools for the learning-impaired are also located in Austin; there is also a large Air Force base approximately 15 miles south of the metropolitan area. In 1989 Austin had approximately 720,000 residents. The 1986 Census ranked the city as the 58th largest in the nation (U.S. Department of Commerce 1986).Like i t s regional neighbors, Albuquerque, Phoenix, and Colorado Springs, Austins recent growth experience has been spectacular. The citys population increased 141 percent between 1960 and 1984. Between 1980 and 1984, Austin was ranked the tenth fastest growing metropolitan area in the country and at one point in the 1980s was dubbed the nations fastest growing city. Austins economy is primarily governmentand service-based. These two sectors constitute 49 percent of all non-agricultural employment. Retail and wholesale trade make up another 22 percent, and of all jobs, manufacturing employment constitutes only 12 percent. While it is correct that the citys economy is not manufacturing-based, between 1980 and 1988, manufacturing job growth was third behind services and trade. Most significantly, during the 1970s and into the early 1980s Austin experienced an annual manufacturing growth rate of 8.3 percent (compared with the nations meager 1to 2 percent). Between 1977 and 1982, manufacturing job growth increased 63 percent, second only to Colorado Springs which, with a much smaller base, increased by 86 percent. Throughout the last twenty years, high-tech manufacturing has led Austins economic expansion, while the citys economy is based on government and services, i t s most dynamic component has recently been manufacturing. High-tech industries comprise approximately 71 percent of all manufacturing jobs. In the 1980s, the largest high-tech manufacturing employers in the city added more than 20,000 jobs (Texas in tile 1980s 1989). Compared with other cities noted for rapid high-tech growth between 1975 and 1985, Austin had the largest high-tech base (more than 40,000 jobs) and grew among the fastest.

History o f High-Tech Manufacturing in Austin

The origin of the Austin high-tech complex dates to the late 1930s when two University of Texas physics professors, Lucien LaCoste and Arnold Romberg, developed a gravity meter for measuring the depth of oil wells in offshore drilling operations (Susbauer 1972). The U.T. Physics Department was an early incubator of numerous small instrumentation firms. Previous researchers have speculated that the industrys connection with physics, as opposed to engineering, partially explains why instruments formed the base of Austins nascent hightech economy (Fig. 2). Similar to a number of other high-tech locations, defense-related research provided another early source of support for Austins high-tech industry growth. The Tracor Corporation, Austins only home-grown Fortune 500 company, began in 1954asa consulting firm which merged with another local firm to become a defense-related high-tech manufacturing corporation. Mapping new firm formations in early Austin underscores the ties among companies thought to have spun off from Trator (Fig. 3). The base of the early Austin technology complex relied on small firms. Almost twenty years passed before a branch plant of a large national corporation located in the city (Susbauer 1972). The first major branch plant siting of a large national firm (IBM) occurred in 1968. IBMs justification for locating a typewriter manufacturing plant in Austin was to facilitate access to the growing southwestern market. From the

Firms having no directly traceable origins from university departments, research laboratories, or other Austin technical lirms are shown without lines and directional arrows

llaliiu indicale firmnot included in the study

Figure 2.

Chronology o f the origins and major changes in the Austin technical community, 1939-68.

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Glasmeier

Continuum (from 1969)

Carbomedics

TRACOR (Associated Consultants and Engineers -> Texas Research Associates)

BDM
AMD Motorola Data General Abbott Labs Lockheed W.L. Gore

Houston Instruments IBM

Control Data Corp.

I
1955
1960

I
1965 1970 1975 1980

I
1985

Johkon Controls

Austron

Texas Radian Instruments Burroughs

Espey Huston

Eagle Signal Tektronix

z$z

McNeil

MCC Martin Decker

bold type indicates Home-grown companies

ROLM Fisher Controls

Figure 3. Development o f Tracor and i t s spin-outs, 1947-84.

beginning this plant was vertically integrated. Almost all material inputs were either made in the plant or received through intracorporate purchasing agreements. Austins second major branch plant siting occurred a year later when Texas Instruments Corporation built a plant t o manufacture office products and desktop computer equipment. Four years passed before a third national corporation, Motorola, opened i t s semiconductor wafer fabrication facility o n the east side of the city. The Ed Bluestein plant i s Motorolas most highly integrated fabrication location, employing device R&D, advanced engineering, and prototype capacity. Between 1974 and 1984, Austin received another twelve branch plants of firms headquartered in other high-technology complexes (Fig. 4). In the early 1980s, Motorola set up a second plant in Austin for i t s microprocessor group. During the same period, Lockheed established a major defense research and development facility. Other major Austin branch plant locations include Advanced M i c r o Devices, which set up another wafer fabrication plant. In 1985 Tandem Corporation moved a design, engineering, and manufacturing plant t o Austin. Finally, in 1986, the 3 M Corporation opened a research facility, the first outside i t s Minneapolis corporate headquarters area. By the early 1980s, Austin was perceived as a newly emerging high-tech center. The city

boasted a considerable stable of both manufacturing branch plants and locally grown firms. In 1983, with the announcement that the Microelectronics and Computer Corporation (MCC) had selected Austin as i t s headquarters, both the city and the states aspirations as centers of high-tech industry seemed assured. A multifirm consortium, M C C i s conducting collaborative research on computer, software, and manufacturing process design and developments. Twelve firms working as a team created the research facility, the first to pursue common research goals in combating international computer and microelectronics competition. Today seventeen firms participate in the consortium.

Austin Today

The heady days of successive branch plant announcements have passed. From 1985-90, Austins electronics and computer industry experienced a slump. Although occasional whispers of possible new plant sitings are still overheard, the last announcement occurred in 1986. Growth moderated considerably during this period; in 1988 Austin added a meager 600 manufacturing jobs. Yet the aura of the complex has been sustained. With the 1988 announcement that Aus-

Merchant Wholesalers
Espey-Huston

405

Tanga. Inc. AM1 Associated Consultants and Engineers College of Engineering Texas Research Associates Texas TRACOR Computer (merged Corp. with Textran) Pinson Guerreros Photographc Group DAC International

Austron

A s s ? ? ;,

Spenco Texas Key Systems Telesystems Concepts Texas Continuum Inc. Tracoustics Research CO. Unitech Institute Weed Radian Instruments SGE

1945

Figure 4.

Major company relocation or founding in Austin, 1955-86. Source: Smilor et al. 1988.

tin was selected as the site for the Sematech consortium, the city once again became a newsmaker. The semiconductor industrys answer to declining competitiveness in manufacturing, research at the Sematech facility i s geared toward improving the nations manufacturing capability while providing incentives and design opportunities for firms that produce manufacturing equipment for the semiconductor industry.

The Early Ingredients How did the Austin complex evolve? What determined its industrial composition? Answers t o these questions must necessarily consider the original base of instruments manufacturing. Instruments are tailored, often oneof-a-kind (sometimes batch- but almost never mass-produced) products with very specific markets. Products are knowledge-intensive and rely on a few specific parts usually made inhouse. This type of manufacturing necessarily limited the formation of local linkages (Glasmeier 1988). Items that were off-the-shelf or could not be produced in-house were easily purchased either through distributors or factory-direct, again further reducing the need for local manufacturing. In the early days o f LaCoste and Rombergs innovation, knowledge of material sources came in part from the U.T. Physics Departments pur-

chasing office. The gravity meter was the first of its kind. Thus it enjoyed high demand by oil exploration companies, and buyers came from all over the world to purchase it. Although the vast majority of product was sold directly from producer to final market, eventually LaCoste and Romberg did use sales representatives for distribution. For a number of years (from the late 1930s to the early 1950s), additions to Austins manufacturing base consisted mainly of instrument manufacturers. Material inputs entered the complex via various channels. Connection with outside suppliers through traditional catalog sales and manufacturers representative, made local manufacturing possible without the formation of an elaborate local parts and equipment fabricating capacity. The economic mix of the University, small instrument firms, state government, and the military combined to support a modest electronic component demand. Component needs were serviced by full-line wholesalers and not until the mid-1950s did a noninstrument manufacturing firm emerge. But at least five years earlier the city generated a local electronics wholesaler. Verifying the model o f early complex formation previously laid out, it is apparent that manufacturing is possible despite the absence of a detailed parts-producing complex. Furthermore, rather than vertical disintegration being the primary basis of complex expansion

406

Clasmeier Prior to the early 1940s, sales of parts for electrical goods were accomplished primarily through firms which performed sales and service. For example, Sears, Roebuck stocked spare parts inventory in their retail outlets as well as offering parts for home and commercial appliance repair in their mail order catalogs. The early formation of electronics wholesaling occurred in response to the need for radio and television repair parts. This type of general line distributor carried a small supply of a wide array of standard parts for hobbyists, tinkerers, and repairpersons. The first phone listing of an electronics wholesale firm dates to 1950. The company provided a broad range of general parts used for equipment sales, repair, and maintenance. By the mid-I950s, the city had five wholesalers (Table 1). One firm, White Instruments, wholesaled parts for other instrument manufacturers as well as for i t s own use. And in 1957 the Motorola Corporation opened an electronics parts and service office providing equipment and parts for television and radio electronics applications. Prior to the 1960s electronics wholesalingwas quite general, providing parts and accessories for equipment repair to a wide variety of industries. For example, Wholesale Electronics, which opened in 1961, stocked small quantities of a broad variety of parts used in maintenance, repair, and testing for commercial equipment companies, the university, state government, computer firms, and the entertainment industry. In these early days local wholesalers kept pace with changes in industry by broadening their product lines rather than further specializing in specific sub-industries. By the early 1960s wholesale operations began to specialize with separate operations for radio and television repair, electronic parts distribution, and maintenance and repair operations for commercial firms. Improvements in air conditioning, complex building systems, and the needs of the city, university and state government resulted in a small proliferation of maintenance and repair distributors. In the mid-1960s the ratio of manufacturers to wholesalers was about four to one. As the complex evolved, various wholesale submarkets emerged and attracted wholesalers headquartered outside the region (Table 2, Fig. 5). In 1963 the first nonlocal firms listed exchange numbers (the precursors to 1-800 toll-free numbers)to sell wholesale electronic parts. One

and diversification, it i s evident that firms operate autonomously with the assistance of information flows in the form of catalog sales, manufacturers representatives, and merchant wholesalers which bring information into a nascent complex and spread the word of local firm offerings outside the immediate market area.

The Spatial Evolution o f Wholesaling: An Empirical Example

This section explores the validity of a mercantile model of regional formation through an analysis of the history of wholesale electronic development within the city of Austin. A restatement of the theory suggests that wholesaling begins as a service providing generalized inputs, sustained through sales responding t o a variety of markets. Over time, as the level of local materials demand increases and the complex evolves, wholesale specialization occurs. Eventually wholesalers from the closest agglomeration sell into the complex. Simultaneously, in response to this encroachment from outside, original wholesalers broaden their product line and serve a more general clientele. Thus a pattern unfolds in which wholesaling begins with local firms, followed by regionally and eventually nationally headquartered wholesalers. In the long run, local merchant wholesalers may simply disappear as they prove unable to match the service capabilities of larger, nonlocal establishments.

The Evolution of Wholesaling in Austin

While the evolution of high-tech industry in Austin i s relatively well recorded, there is no documented history of wholesaling in the city. Nonetheless, interviews with wholesalers who have operated in Austin since the early 1960s and analysis of phonebook entries dating back to the late 1940s and early 1950s provide anecdotal documentation t o trace the evolution of this activity within the metropolitan area. Electronics wholesaling in Austin gradually evolved from the sale of electrical parts for the repair and maintenance of commercial and domestic equipment to trade in electronics goods.

Merchant Wholesalers

407

Table 1. Number of Electronics Wholesalers, 1950-87

Nonlocal Nonlocal distrib- phone utors numbers National firms

Table 2. Location of Out-of-town Distributors Listing Toll-free Numbers in Austin, 1965-88 1965
S a n Antonio Houston (2) Dallas (2)

1971
Dallas (2) Plano, TX Houston Hauppauge, N Y Philadelphia

Total

1950 1955 1960 1965 1971 1975 1980 1985 1988

1 5 6 15 13 19 40 52 50

6 6 13 15 20 18

5 6 10 11 10 12

la

3 1,2 5 9 7

1975
Plano, TX Houston (3) Hauppauge, N Y Dallas (2) Van Nuys, CA Stafford, TX Fort Worth

1980
Plano, TX Dallas (2) Addison, TX Shreveport, LA Houston (2) Dayton, OH Van Nuys, CA Fort Worth New York

Source: SouthwesternBell, Austin telephone directory, selected years 1950-88. a indicates national firm with toll-free number.

regional firm headquartered in Dallas listed two offices (one in Houston and one in Garland), while another listed a San Antonio address. Parts purchased from these nonlocal distributors were commonly shipped on Greyhound buses, an early form of overnight delivery. In 1964 Hall-Mark Electronics Corporation, a large national distributor headquartered in Dallas, opened an operation in Austin (Table 3; Fig. 6). Through the late 1960s, the city continued to add wholesalers, both nonlocal distributors and local firms with warehouses in Austin. There was also considerable merger activity as nonlocal wholesalers bought up Austin companies. As the large firms began to dominate wholesale trade, it became increasingly difficult for smaller, local firms to survive. About this time electronics manufacturing firms headquartered outside the local area in Dallas, Houston, California, and Oregon (e.g., Hewlett-Packard and Textronix) also began advertising in the yellow pages. Many out-of-town and out-of-state firms operated sales offices rather than manufacturing products in Austin. A second top-twenty national distributor also opened a warehouse in 1969. Additional locally owned distributors formed through the mid-1970s. Nonetheless, the citys wholesale base was dominated by nonlocal firms, some of whom established local warehouses while others simply listed toll-free numbers in the telephone book. In the late 1970s, the city added two national chains, and local wholesalers once again comprised more than half of all distributors (16 of 27). By the end of

1985
Plano, TX (3) Brownsville, TX Dallas Channel View, TX Dayton, OH Van Nuys, CA Fort Worth (2) ..

1988
Plano, TX (6) Dallas (2) Stafford, TX S a n Antonio Van Nuys, CA Fort Worth

Source: SouthwesternBell, Austin telephone directory, selected years 1965-1988.

the decade, seven national wholesalers had established either a sales office or a warehouse in Austin. Of 42 electronic wholesalers, more than half were single location operations. The citys base of high-tech manufacturers and wholesalers grew in lock-step through the 1980s. The presence of wholesale firms headquartered outside the city remains strong despite corporate and territorial reorganizations which have led to the closings of warehouses and the consolidation of stock in a few regional facilities.

An Empirical Example o f Contemporary Distribution Relationships

Based on circumstantial evidence, I have suggested the importance of wholesalers in the early formation of the Austin complex. The

to8

Clasmeier Regional and National Wholesale Firms with Local Branches and Parts Producers with Sales Officesa

Table 3.

1964
Hall-mark Electronics Hdq., Dallas

1977
Sterling Electronics Hdq., Houston

1981
Arrow Electronics Hdq., Melville, N Y Kent Electronics Hdq., Dallas

1969
Newark Electronics Corp. Hdq., Chicago

1978
Hamilton-Avnet Hdq., New York

1982
Kierulff Electronics Owned by Ducomrnun Hdq., Cypress, CA

1979 1974
Schweber Electronics Inc. Owned by Lex Electronics Hdq., London Southwest Electronics Hdq., S a n Antonio

1984-85
a

1980
Altair Co. Hdq., Richardson, TX Pioneer Electronics Hdq., Cleveland a Fairchild Serniconductors a C T E Micro Circuits

N E C Electronics

1988
Wyle Laboratories Hdq., irvine, CA Time Electronics Hdq., New York

1976
Berg Electronics Div. of Dupont

Hdq., Delaware Norvell Electronics Hdq., Dallas

a

Source: Southwestern Bell, Austin telephone directory, selected years 1964-88. Sales offices of national and multinational manufacturers.

evolution of the complex has been traced by examining, over a concurrent period, changes in wholesaling and increases in high-tech manufacturing(Tab1es 1and 4). The complexs initial requirements for electronic inputs were probably satisfied by local wholesalers catering to a broad base of input needs. Over time this was followed by increasing wholesale specialization as the economy developed. Some wholesalers evolved in place, others established presence via long distance toll-free numbers. This last section explores the importance of wholesaling in the contemporary period. Based on a survey of firms, the importance of distributors in the contemporary functioning of the Austin hightech economy is evident. Generalizationscan be made about the probability of distributor usage based on industrial linkage theory, but results presented earlier indicated that the majority of firms, regardless of industry, used a mixed channel strategy to distribute their products. Referring to Figure 1, it is also obvious that firms in the electronics industry used outside distribution agents with great frequency. Examination of the distribution trade literature and interviews with whole-

sale distributors further indicate that distributor usage i s rising. The advancing speed of product life cycles, heightening international competition, expanding geographic markets, and growing importance of small firms all improve the probability that firms will use distributors in lieu of direct sales forces. Given that the concern here is with the nascent stages of complex formation, high levels of distributor usage would be expected (because local demand remains insufficient to warrant local production). Furthermore, it has been established by others that high-tech product markets are almost exclusively nonlocal. Therefore I anticipate that most manufactured goods are not destined for consumption within the complex. Accordingly, the following research results are an initial attempt to identify the contemporary importance of wholesalers i n a newly forming complex. In more mature complexes, the frequency and scale of demand have presumably precipitated the development of local manufacturing capacity of some material inputs. Nevertheless, anecdotal evidence from national distributors indicates that even in mature complexes, distributor usage is high.

Merchant Wholesalers

409

Figure 5. The location of out-of-town distributors listing toll-free numbers in Austin, 1965-88.

Sample Description

local sample by adding firms which had not participated in the state survey.

The sample of firms interviewed in this study was drawn from the 1986-87 State Survey of Manufacturers (published annually in the state since the late 1950s). In addition to this reference, I cross-classified the original list of firms with those advertising in yellow pages of the municipal telephone directory. The use of the phone book improved the completenessof the

Sample Construction

This study focuses on high-tech products in the electronics, communications, aerospace, computers, instruments, and medical equipment industries. A total of 126 firms were identified for interview. Seventeen were eliminated

410

Glasmeier

Table 4.
Year

Number of High-Tech Manufacturers, 1950-87

Firms Year
Firms

1950 1952 1954 1956 1958 1960 1962 1964 1966

1 2 1 2 5 10 21

1969 1973 1976 1978 1979 1981 1982 1983 1986

30 37 53 52 61 82 110 77 110

Source: This table combines the firms listed in the local telephone directory with those listed in the Texas Manufacturers Guide, Bureau of Economic Research, University of Texas, Austin, 1986.

Figure 6. Regional and national firms that established local branchesand parts producersthat opened sales off ices.

The universe of firms was reduced to 103. O f these, 62 companies completed face-to-face interviews. Of those which did not respond, 22 were unable to complete the questionnaire either because the appropriate respondent was unavailable, the informationwas proprietary, or there was some other extenuating circumstance. Nine firms refused to be interviewed. Five companies were no longer in business, and an additional six were misclassified; they did not fall into the prespecified industry categories. Examination of the firms that did not answer the survey reveals that they were on average smaller than those that did respond.* The divergence i s explained by a higher responserate with the largest firms in the city. Overall, the study consisted of 68 percent small firms with fewer than 100 employees; these small firms constituted 77 percent of the total number of firms in the population. Based on a second measure, the percentage of firms locally owned versus branch plants of nonlocal corporations, there was no significant ownership bias in the firms that failed to respond.

because they did not manufacture a product with an SIC code corresponding to a 3-digit industry category listed in Table 5 and another six were excluded because their major product was a service. Of the manufacturing firms excluded, more than half were chemical companies. The remainder comprised a broad group of general manufacturing inputs such as plastic parts, rubber molding, and miscellaneousmetal parts.

General Characteristics o f Firms in the Study

The group of firms studied is dominated by small, locally owned firms a t least five years old. Companies are concentrated in three sectors: electronics, scientific instruments, and computers. Overall the firms are R&D intensive; 76 percent indicated they spent 3 percent or more of after-sales revenues on research. Austin firms also employ a significant number of technical

Merchant Wholesalers
Table 5. Industrial Classification of Firms Interviewed and the General Population (YO)
Sample Population

411

f Inputs Purchased Table 6. Percentage o from Local Manufacturing Firms

PercentInDut Raw materials High-tech inputs Low-tech inputs High-tech services Production equipment age Satisfied locally

SIC 28 SIC 35 SIC 36 SIC 37 SIC 38

5
13 39 1 32

4 9 53 1.6 31

of firms

Source: Texas Manufacturers Guide, Bureau of Economic Research, University of Texas, Austin, TX, 1986.

70 56 50 56 67

<20 <20 <20 <20 <20

employees. Sixty-four percent indicated that 10 percent or more of their workforce was comprised of engineers and technicians. As found in studies of other high-tech industry concentrations, the market for Austin firms' goods i s decidedly nonlocal (Oakey 1984; Goldstein and Malizia 1985; Hagey and Malecki 1986; Gordon et al. 1988; Porterfield 1988). Forty percent indicated their markets were located entirely outside the local area. Another 45 percent sold less than 15 percent of their output to local firms. As part of this study I questioned the origins of different types of inputs used by local firms. Borrowing and modifying Hagey and Malecki's research design, 1 grouped inputs into five categories: unfinished materials (such as sheet steel, aluminum, glass); low-tech inputs which were either off-the-shelf or were routinely (without special processing) produced (such as greases, boxes, batteries); high-tech inputs (goods in short supply which required special processing, were especially pure, or required sophisticated production technology, such as quartz crystals, precision lenses, ASICs-application specific integrated circuits); high-tech services (software, engineering, consulting, etc.); and production equipment (lathes, bonders, milling machines). Each respondent was prompted about distinctions between high and low-tech inputs and each gave an example of what constituted high and low-tech inputs to hidher firm. While not clear-cut in every instance, the majority of firms agreed that the distinction was important in their material input purchasing decisions. As part of the study, local linkage purchases were identified (Table 6). In general, firms purchased little in the way of material inputs from local manufacturers. The majority of firms (56 percent) satisfied less than 20 percent of their needs through purchases from firms manufacturing high-tech inputs locally. Low-tech in-

puts were bought with slightly higher frequency (50 percent of local firms purchased less than 20 percent of their low-tech inputs from local manufacturers). This may reflect the ubiquitous nature of such goods, their tendency to be standardized, and their availability from a variety of vendors. Only 44 percent purchased substantial amounts of high-tech services such as computer programming and management consulting locally, and 67 percent purchased 20 percent or less of their production equipment from local manufacturers. These results are quite similar to a study of high-tech manufacturing conducted in Florida (Hagey and Malecki 1986). Low levels of linkages reveal there are alternative solutions for acquiring inputs. As markets become more extensive and corporations develop increasingly complex divisions of labor, market intermediaries gain importance. Beyond acquisition of inputs and reduction o f transaction costs, firms use them for strategic reasons. Thus pertinent considerations include: how do distributors operate in a local economy? what types of inputs do they provide? and how does knowledge of distribution theory enhance our understanding of interfiim transactions?

Distributor Use for Material Input Acquisitions

To determine and explore their uses of distributors, firms were asked whether and for what inputs they used distribution channels. Specifically we questioned whether they purchased their inputs from a distributor or by ordering factory-direct (defined as transactions with the original equipment manufacturer as opposed to with a market intermediary). As it was difficult to standardize for the year of purchase, survey questions pertaining to the acquisition of capital equipment were eliminated.

412
Table 7.

Glasmeier Acquisition of High-Tech Inputs Number Table 8. Distributor Factory direct

Total

Acquisition of Low-Tech Inputs Number

23 13 36
By location of headquarters

Distributor Factory direct Total

By

35 9 44

location of headquarters
Local
Total

Nonlocal

Nonlocal

Local

Total

Distributor 7 (63.6%) 28 (84.8%) 35 Factory direct 4 (36.4%) 5 (15.2%) 9 33 44 Column 11 Chi-square 2.28148 Significance 0.1309
By size of firm
Small
Large

Distributor 4 (57.1%) 19(65.5%) 23 10 (34.5%) 13 Factory direct 3 (42.9%) 29 36 Column 7 Chi-square 0.17141 Significance 0.6789
By size of firm Small
Large

(1 -100)

(101+)

Total

(1 -100)

(101+)

Total

11 (78.6%) 35 Distributor 24 (80.0%) Factory direct 6 (20.0%) 3 (21.4%) 9 Column 30 14 44 Chi-Sauare 0.01197 Significance 0.9129
By age of firm in years

Distributor 16 (72.7%) 7 (50.0%) 23 Factory direct 6 (27.3%) 7 (50.0%) 13 Column 22 14 36 Chi-square 0.91548 Significance 0.1664
By age of firm in years

1-5

6-20

21-33

Total

1-5

6-20

21-33

Total

Distrib11 (84.6%) 17 (70.8%) 7 (100.0%) 35 utor Factorydirect 2 (15.4%) 7 (29.2%) 9 Column 13 24 7 44 Chi-square 3.12495 Significance 0.2096

Distrib6 (75.0%) 12 (57.1%) 5 (71.4%) 23 utor Factory direct 2 (25.0%) 9 (42.9%) 2 (28.6%) 13 Column 8 21 7 36 Chi-Sauare 1.01481 Significance 0.6021

Office supplies and equipment are purchased much more regularly, so we substituted questions about these inputs. In general, firms used distributors for unfinished materials, high-tech inputs, office supplies, and (to a lesser extent) low-tech inputs. The majority of firms purchasing unfinished materials used distributors (76 percent). There was no significant difference based on firm size or age, but a larger portion of locally headquartered and nonsubsidiary firms used distributors than did their nonlocal brethren. Although the percentages differed significantly, the majority of firms, regardless of characteristics such as size, age, or location, used distributors to secure both high and low-tech inputs (80 and 64 percent respectively). Distributors were used to purchase high and lowtech inputs for both small and large firms (Tables 7 and 8). Although both locally and nonlocally headquartered firms purchased from distributors, the locally headquartered companies were more likely t o use distributors for

both types of inputs than their nonlocal counterparts. Also there was a suggestion of some discrepancy accountable for by age (older and younger firms used distributors more often). These results, however, were not statistically significant. Ialso examined the use of distributors for the purchase of high-tech versus low-tech inputs (regardless of firm characteristics). Cross tabulation of. this relationship indicates there is a statistically significant difference between firm use of distributors for each type. This confirms an earlier implied hypothesis that firms will purchase low-tech goods locally and factorydirect with greater frequency than they do hightech inputs. We also tested for differences in the percentage of high and low-tech goods manufactured locally. As anticipated given the nonlocal nature of high-tech markets, there was a statistically significant difference between the percentages of high and low-tech goods manufactured locally. Respondents indicated that the low-tech goods they purchased were man-

Merchant Wholesalers ufactured locally more often than were hightech inputs. Certain inputs, such as office supplies and equipment, were overwhelmingly acquired through distributors (more than 95 percent). This finding may reflect that office supplies consist of hundreds of discrete but standard items (pens, pencils, paper) bought in relatively small lots. Given the broad range of products, nosingle producer is likely to manufacture them all. Moreover, the vast number of markets (often small in size) inhibit the efficient use of strictly factory-direct sales. Instead producers rely on distributors to reach wide-ranging markets. In contrast, office equipment is produced by relatively few large firms. Factory-direct purchases are no doubt made by large corporations with national accounts, but the broad range of this market also necessitates the use of distributors. These results contrast with general findings about the spatial location of industrial linkages. Previous studies verifying the importance of local proximity in the purchase of high-tech inputs may erroneously equate local purchase via distributors with local production. Clearly these results suggest greater precision is necessary to establish distinctions between goods produced locally and those purchasedthrough intermediaries. I originally anticipated that the use of distributors would vary based on the type of product and the age, ownership, and size of establishment. But firms used distributors mostly regardless of these classifying characteristics. Further examination of the data to determine whether increases in local purchases resulted in more factory-direct purchasing indicated that regardless of the share of purchases made locally, firms used distributors for the acquisition of inputs. A shortcoming of this analysis is that we did not determine the dollar value of all inputs purchased through distributors. While a great volume of material may be purchased through these intermediaries, it is still possible that critical (high-value) inputs are purchased factorydirect. Respondents were asked what percentage of their input purchases consisted of goods manufactured locally. For the residual input, we asked what percentage was purchased factory-direct and what percentage was acquired through a distributor. On the basis of the original study, we cannot definitively in-

413

dicate the quantitative importance of distributor linkages. A follow-up study currently underway will determine what percentage of inputs (by value) are purchased through distributors. Quantitative information about the percentages of inputs purchased locally versus factory-direct or through distributors i s being collected. In this second study, additional distinctions are being made concerning the types of inputs purchased through distributors and the use of distributors with stocking locations in Austin. Preliminary results support the assertions of the implied importance of distributors examined here. As this second study is incomplete, I cannot make quantitative generalizationsabout the results, nor can I discern purchases made between local and nonlocal distributors. Nonetheless, survey results are important first indicators of the use of distributors. Future findings will help substantiate the importance of this relationship in industrial complex formation.

Conclusions
The evolution of wholesaling in central Texas illustratesthe importance of interregional trade in new industrial complex formation. This relationship should not be surprising. Results only confirm the suggestions of Pred, Vance, and Meyer that complex formation rarely results solely from endogenous forces and i s instead importantly facilitated by trade agents originating outside a region. Because the existing literature is dominated by the vertically integrated firm presumed to internalize distribution functions (obviating the importance of external distribution channels), trade agents have gone largely unnoticed. But the development of new industries, expansion of sectoral and geographic markets, and the growing importance of entrepreneurial firms all establish the need to consider distribution channel structure when analyzing industrial linkage formation. Of equal importance is the geographic expansion of the wholesale function. These results validate insights found in both Vance's and Meyer's early treatments of wholesaling and regional development. In particular, the evolution of wholesaling in Austin closely follows Vance's original notion of "internalization." As the city's economic base specialized more and more in high-tech manufacturing, Austin be-

414

Glasmeier tates the demand for local production of standardized goods. The transactions cannot be viewed in isolation. They must be considered jointly to explain the diversity of production experiences found in different locations. The persistent importance of wholesalers in the local economy simply underscoresthe point that firms use mixed channels to distribute their goods and by implication buy material inputs from both internal and external agents. Future linkage studies must therefore go beyond asking whether a good i s purchased locally. As this analysis has attempted to demonstrate, the answer to this question is just as likely to lead to the warehouse of a distributor as to the loading dock of a manufacturer. We must acknowledge that new production mandates call for increasing use of distributors (as firms attempt to implement JIT inventory practices). It is also critical to understand the choices of distribution channels selected by firms over the lives of both the product and the firm. We must delve further into the workings of firms to discover how they select and then carry out their marketing strategies. Here I have suggested distributors importance in the early formation of a complex. I have stressed the fact that as some form of industrialization takes hold in a local economy, wholesalers are attracted to service new specialized needs. S ti l l unexplored i s the role of distributors in the evolution and eventual integration of complexes over time. For example, are wholesalers only important in the absence of prior industrialization? Anecdotal evidence from Pittsburgh, a former industrial city which aspires to become a high-tech center, suggests initial aspirations are not being met with the formation of local manufacturing linkages. Instead the city is the recipient of sales offices and wholesale distributors of high-tech manufactured goods. On the basis of the results reported here, the first stages of industrial development may quite regularly consist only of trading agents who would eventually be accompanied by local production as the complex takes root. Thus there i s a need to examine the transformation of complexes as they grow, change and mature, and intraregional production relations unfold. New industrial complex formation i s expedited by the activities of market intermediaries. While it might be appropriate to view major complexes and longstanding agglomerationsas self-contained systems, some o f their suste-

came a profitable location for national wholesalers. Eventually, by offering superior service and variety, national and regional wholesale firms came to dominate the areas high-tech wholesale market. Local firms retreated to very general and mostly nontechnical product lines. This study also confirms Meyers original hypothesis about the progression of wholesaling developing across regions. (Initially a wholesalers reach stretches from an agglomeration to a frontier location, in this case from San Antonio to Austin). His model did not adequately address the power of national firms and their ability to penetrate a frontier location, eroding any geographic advantage associated with initial proximity. A mixed channel strategy is the dominant sales structure of manufacturing firms. Few enjoy the luxury of dealing directly with original equipment manufact urers (OEMs). Both ti me and place constraints often prohibit factorydirect transactions. While we might correctly assume that large incorporated firms pursue a rational material acquisition strategy, purchasing policies of small firms and newly established enterprises often border on chaos and exhibit limited premeditation. More importantly, small firm order size is simply too small and therefore costly for OEMs to service. Consequently there is no alternative to using distributors. A growing body of current research focuses on production-based explanations for industrial complex development. Examination of wholesale distributors questions this singular explanation of complex formation and linkage establishment. As Vance and Meyer noted, the growth of regions is governed by a process of internalization. Primary stages of development are facilitated by firms that trade-in from the outside. After some point, local consumption may precipitate local production for goods which require tailoring or are standard and therefore face far-reaching local demand. Scott rightly identifies activities such as mold making, metal fabricating, etc. as following the pattern (1988). This analysis does not deny the importance of existing theoretical insight. Rather I simply state that the evolution of such activity alone does not make an industrial complex. In particular, time and place constraints often preclude a local production-based solution to even the most basic material acquisition problem. The interplay of demand for goods manufactured outside and those traded-in facili-

Merchant Wholesalers nance is clearly determined b y firms abilities t o reach out to new economic centers. Through examination of t h e complex interplay between existing and newly forming agglomerations, w e f t h e evolucan enhance our understanding o t i o n of t h e space economy.

415

Acknowledgments
The author would like t o thank the University Policy and Research Institutes of the University of Texas at Austin for support of this research. Students in the regional research seminar of the Graduate Program of Community and Regional Planning participated in the design, development, and implementation of the survey. Their assistance was essential to the completion of this project. The author wishes to thank Amy K. Teran for substantive discussions and editorial assistance during the various phases of the manuscripts life. The author would also like to thank the reviewers who provided invaluable criticism of earlier drafts, and whose comments greatly strengthened the theoretical argument. Finally, special thanks to Bennett Harrison, FIavia Martinelli, Erica Schoenberger, Morgan Thomas, William Beyers, Mary Beth Pudup, and Barney Warf for comments on earlier versions of this paper. As always, any and all omissions are attributable to the author.

Notes
1. But as Hoare (1985) notes, these historic studies (i.e., Wises examination of the Birmingham gun and jewelry industries) were based only on visual observation, not surveys of firms material input requirements or markets. When scholars have studied quintessential industrial quarters (e.g., London), they have found that less than half of all firms had any local linkages whatsoever. 2. Wholesale establishments increased 43 percent between 1972 and 1982, the last year for which data were collected by the U.S. Department of Commerce. Over the same time, the percentage of manufacturing declined nationally. 3. For example, David Harvey notes the historic importance of merchants in the spatial organization of production in Paris (1985). lntrametropolitan clusters of households producing highly divisible goods, such as silk flowers, came together in space for the convenience of the merchant. Harvey argues that the merchant created the division of labor and producers clustered near merchants to gain access to markets and material inputs. 4. By analogy, the same can be said about local production; as long as local consumption is less than sufficient to support local production, then exchange with producers from outside is efficient. 5. The degree o f specialization may be determined by demand at the origin of the wholesaler and not at the frontier location.

6. The extent that a firm relies on internal manufacturing versus off -the-shelf parts buying depends fundamentally on product type. If the product is an assembly of off-the-shelf components such as a computer, then a firm will buy the parts needed and assemble the good. But if the product is highly tailored for a specific end-user and requires the manufacture of unique parts, then the firm is likely to fabricate the inputs within the firm. 7. Developing a sample framework for conducting a local survey of firms is a difficult endeavor. No single source of data provides a comprehensive list. Unlike the federal government, which draws names and addresses from the internal Revenue Service and Social Security systems, except for tax purposes, no local or state government organization has power to enforce a firms response to inquiries. Thus, there is no effective mechanism for developing a complete directory of firms. Often local and state guidebooks are based on imprecise collection methods which resort to such sources as word-of-mouth or new firm announcements in the media. The use of the phone book (while adding to the potential capture rate of interview subjects) has additional limitations. Firms pay a fee for listing their businesses in the telephone directory yellow pages. This means that some small establishments that may not be able to afford the costs of advertising or that may not have a local market either cannot or will not purchasea directory listing. Also firms classify themselves. Advertisers decide the industrial categories within which they wish to be listed. Therefore some companies could be erroneously classified as manufacturers when they are in fact manufacturers representatives, distributors, or consultants. As partial compensation for this potential bias, firms which do advertise in the phonebook are more likely to sell their goods locally or at least want to have a visible local presence. Another problem with local data sources is difficulty in maintaining the currency of firm lists. Updating the database when firms are no longer in business, have changed their form of business, or have merged is particularly problematic, especially when trying to establish a measure of the universe of firms. 8. Contact the author for further details about the sample characteristics.

References
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