amy glasmeier -the role of merchant wholesalers in industrial agglomeration formation

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The Role of M erchant W holesalers inIndustrial Agglomeration Formation

A m y Clasmeier

Graduate Program in Community and Regional Planning, University of Texas a t Austin,

Austin, TX 78712

Abstract. This paper explores the impor-

tanceof merchant wholesalers in he early for-

mation of industrial agglomerations. Mer-

chant wholesalers reduce the size constraintof local markets by extending an entrepre-

neur’s market reach. The merchant wholesale

function also facilitates the formation of the

division of labor by allowing greater loca l spe-

cialization. Merchant wholesalers are hypoth-

esized to be part of the complex formation

process. In the early stage of a complex’s de-

velopment, these intermediaries trade-in from

outside as local demand warrants. Over time,

local wholesale functions unfold. As a com-

plex grows, these wholesalers specialize, cre-ating a range of wholesale operations. The

process of merchant wholesaler formation i s

thought to be dialectical; prior generationsof

technology lay the basis of subsequent mer-

chant wholesale specializations. A mode l of

wholesale evolution i s presented and tested,

basedon a case study of firms in Austin, Texas.

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

HE emergence of new innovative in-

dustry 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 hypoth-

esis suggests that product cycle forces and di-minished seedbed capacity resulted in a cu-

mulative shift of innovative industries toward

the US. Sunbelt. initial branch plant relocation

was followed by a process of “in-filling” which

nnals of the A x m i a t i o n of American Ceographwr, 80 3), 1990, pp. 394-417opyr ight 1990 by Association of American Geographers

resulted in the creation of new centers of in-

novation (Norton and Rees 1979).

At the metropolitan level, case studiesof in-

novative regions cite place-specific character-istics as the genesis of new complexes. These

factors include personal location decisions

(Saxenian1985;Rogers and Larsen 1984),selec-

tive and unduly concentrated levels of federal

research and development expenditures (Mar-

kusenet al. 1990), nd synergism among various

local factors which resulted in a new territorial

innovation complex (Stohr 1986).Using a con-

ceptual framework based on product-process

characteristics, i have previously argued that

local transactions are regulated by ownershipimperatives and corporate customs that inhibit

or encourage linkage and spinoff formation

(Glasmeier 1988).Scott and Storper (1987) on-

tend that occasionally ”windows of opportu-

nity” are opened by an initial spark of indus-

trialization. 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 inter-nal integration of cities (1988).The divisibility

of certain labor processes makes possible ver-

tical disintegration of production. These trans-

actions are either undertaken through internal

production or obtained through market ex-

change. As firms contract out for the separable

activities which are more costly if executed

within the company, and market transactions

replace internal production, geographic “in-

filling” occurs.

This body of literature operates a t three geo-graphic levels in suggesting why industries lo-

cate proximately and in exploring the impor-

tant determinants of expansion in favored

locations. The viewpoints are welcome addi-



Merchant Wholesalers 395

tions to our knowledge about agglomeration

formation. But with one exception, each ac-

count treats the process of city formation in

isolation (Clasmeier 1988). Thus the evolution

of a new complex has been discussed inde-pendently of other cities, and only now are we

invited to look within as opposed to outside

complexes for factors that precipitate the ex-

pansion of new agglomerations. Theoretical

treatments do not identify the locational and

organizational conditions that nurture the in-

fancy of a new formation.

In this article, I argue that new complex for-

mation must be analyzed and considered from

a perspective which, rather than treating in-

dividual cities discretely or in isolation, encom-passes what will call the city system. Regardless

of the original stimuli for a complex’s forma-

tion, it i s the interaction between i t and other

cities that leads to growth and development

over time (Pred 1977). Time and place con-

straints that regulate the material transforma-

tion 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 dis-tant markets and newly forming agglomera-

tions, particularly in a complex’s formative

stages. Frontier locations emerge and ultimate-

ly flourish through the intermetropolitan rans-

mission of growth, assisted by intermediaries

linking preexisting complexes to newly form-

ing ones.

This paper addresses a number of issues that

have been only weakly conceptualized or largely

ignored in the contemporary literature on in-

dustrial agglomeration formation. The first

concern revolves around a region’s ability to

specialize (thus innovate and grow) and i t s de-

pendence on trade. In the early stage of a com-

plex’s development, external trade allows firms

to specialize beyond what local demand sup-

ports. The flow of goodsand services is accom-

plished primarily through direct sales by pro-

ducing 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 explore the

role of market intermediaries (emphasizing

merchant wholesalers) in the expansion of trade

among regions and sketch out their locational

implications. I then turn to a model of regional

formation which i s based on the concept of

stock control, viz., one expression of how fron-

tier locations are incorporated into a national

system of cities (Meyer 1980). By reassertingtrade 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 un-

derstand the motives behind firms’ choices of

distr ibution channels. Wi th the rise of the ver-

tically integrated corporation, the functions of

distribution and material acquisition are inter-

nalized within the firm. As later sections willelaborate, vertical integration best describes

industries in which there are few large sellers

and market share i s maintained by superficial

product differentiation and extensive market-

ing and sales functions. As the specific concern

i s with centers of new industrial innovation

where complexes expand through a processof

new product development, I abandon the

overly deterministic framework originally de-

tailed by Chandler (1966; see Porter and Livesay

1971).

By linking firm distribution strategies with the

geography of metropolitan development, an

evolutionary model of agglomeration forma-

tion can be articulated which incorporates

wholesale trade. The formative stages of an ag-

glomeration rely upon new product develop-

ment and entrepreneurial initiative. Over time

as the complex achieves some success, nonlocal

wholesalers trade-in to satisfy periodic and in-

creasingly specialized wants. As an agglomer-

ation grows in size and complexity, specialized

wholesalers establish a geographic presence.

While local production may be sufficient to sat-

isfy basic material input needs, wholesaling re-

mains strong, particularly for specialized goods.

Even with the introduction of large multilo-

cational firms, specific immediate needs are

often satisfied through distr ibution channels.

This model s elaborated by examining the evo-

lution of a new high-tech industrial complex,

Austin, Texas, first through a historical exami-

nation of merchant wholesale evolution in the

electronics industry and then via a firm survey

which identifies the extent that firms currently

use distributors. conclude with comments on

the importance of interregional trade in new

agglomeration formation.



396 Glasmeier

The Role of Wholesalers andFirm Marketing Strategies

Definition of Wholesalers

Before proceeding, it i s necessary to define

wholesaling. Elsewhere I have shown that the

wholesaling function can be broken down by

scale, industry, and type of transaction (Glas-

meier 1989). Borrowing from Vance, wholesal-

ing 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 fam-

ily need. Further clarification indicates that

wholesaling involves the sales of one entre-

preneur to another, intended for resale by the

second. Vance concludes, the purpose rath-

er than the scale is the determinant in these

instances (1970).

This study focuses on ful l-function merchant

wholesalers who take ti tle of goods and accept

all ownership risks. They typical ly buy in large

quantities, break bulk, assemble, sort, sell, and

deliver. Merchant wholesalers are also sector-

ally specialized, and they undertake various

forms of product adjustment as goods move

between the manufacturer and the f inal cus-

tomer. These enhanced distributor functions

have many names, including ki tt ing (the assem-

bly and pretesting of complex parts), assembly,

and value-added distribution. Such services

continue to evolve as firms attempt to meet

manufacturers' ]IT (Just n Time) inventory re-

quirements. In finishing, testing, making man-

ufacturing adjustments, and packaging, distrib-

utors virtually eliminate the receiving firm'sneed for preassembly inspection. Inputs are

scheduled to arrive a t the factory in time for

immediate insertion on the assembly line

(Johnstonand Lawrence 1988; Graves 1989).

Distributor Usage in Manufacturing

While this article highlights high-tech indus-

tries (considered footloose and therefore most

likely to use the services of market interme-

diaries), 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-

turing firms (ordered by broad SIC [Standard

Industrial Classification] categories), 54 percent

reported they useda combination of marketing

channels which included both their own sales

forces and distributors to sell their productsand 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 in-

dicated they bought factory-direct; 23 percent

used distributors. Thus, on a purely numerical

basis, it i s clear that firms use a variety of chan-

nels to distribute their goods and to acquirematerial inputs. Given costs, time, and service

requirements, the use of intermediaries i s ex-

pected to increase in the 1990s (Crespedes

1988a).

The key to distribution i s the provision of

place and time utility. Place utili ty refers to the

satisfaction of demand in i t s immediate loca-

tion. 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 mak-

ing provisions to fu lfill it, the merchant whole-

saler ensures both place and time utility.

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 pur-

poses, 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 in-

termediaries to distribute goods and, by im-

plication, determine what kinds of goods and

inputs firms purchase through distributors.

Reasons for Using Indirect Channels

It has often been said that firms can eliminate

the middleman, but not the functions per-



M erc ha nt Who lesa le rs 397

Chemical & Allied Products

Stone, Clay & Glass Products

Primary Metal Industries

Fabricated Metal Products

Machinery, excep t Electrical

Electrical& Electronic Equipment

Transportation Equipment

Instruments& Related Products

Misc. Manufacturing ndustries

Figure 1. Percentage of manufacturers using various channe ls of distribution.

80 0

f o r m ed (Druc ker 1962). Thus wh i l e a f i rm may

choose to d is t r i bu te i t s o w n g o o d s a nd c i r c u m -

ven t t he ne ed fo r i nd i rec t channels , it must s t i l l

b reak bulk, sort, transport, f inance, service, and

m arke t i t s pro du cts (Cox 1965; B owersox e t a l.

1968).

Compa nies use distributors in l ieu o f d i r ec t

sales for ma ny reasons. These inc lu de t he cost

o f o therw ise ma in ta in ing an i n te rna l sa les f o rce

(Crespedes 1988b); th e ro le of ad jus tmen t and

mar ke t access requ i red to im p le m en t ]IT (G iu -

ni pe ro an d O’Neal 1987; Socolovsky 1985); the

increasing use of com pu t e r i zed l in ks be t w een

m a nu f a c t u re rs , w ho l esa le r s , an d f i na l cus -

to m er s (Kastiel 1987; Russell 1985); th e increa s-

ing segmentat ion of markets which span nu-

me rou s ge og rap hic locat ions (Rayner 1986); the

e f fec t of f o re i gn co m p e t i t i on i nvad ing dom es-

t i c marke ts (Ker r 1987); an d th e n ee d fo r prod-

uc t - re la ted ad jus tments to sat isfy customer

needs (Be rt ran d 1986; T em in 1985). In add i t i on

t o th e established r o le of wholesalers, these

ent i t ies a re i ncreas ing l y cons ide red t he most

ef f i c i en t and p ro f i t ab le means by wh ich spe-

c ia l i zed pro du cer s can gain access to g r o w i n g

markets.

Channel Strategy Depends on Product

Transaction cost analysis is i m po r t an t in de-

scr ib ing th e use of ver t i ca ll y in teg rate d versus

in te rmed ia ry ma rke t i ng channe ls (W i ll iamson

1981a, b). In this instance, th e ke y i s “asset spec-

i f ic i t y ” w h i c h descr ibes the spec ia l ized kno w l -

edge built up by agen ts d i s t ri bu t ing a p rodu c t

a n d t h e t y p e o f s e rv ic e p r o v i d e d b y m a r k e t

i n te r m e d i a r ie s w h o d i s t r ib u t e g o od s . T h e

cho i ce of chan nel s t ra tegy i s a cr i t ica l dec is ion

usually based on t he t o ta l cos t o f execu t i ng a

t ransac ti on and the com pet i t i ve cond i t i ons in

t he marke t (Ma gra th and Hardy 1987).



398 Clasmeier

Channel strategy has traditionally depended

on the type of product-specialized versus

mass-produced (Crespedes 1988a). Intensive

distribution (product placed in as many loca-

tions as possible) usually occurs with consumergoods. Selective channels cover the goods cus-

tomers actively seek for specific purposes (e.g.,

electronic products). Exclusive distribution oc-

curs when a good i s 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 iden-

tifiable 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 chan-nels depends on the extensiveness of users, the

prospect for future market segmentation, in-

creasing market competition, expanding geo-

graphic dispersion, and the prerequisite ser-

vices needed to support a sale.

Channel strategy for new products depends

on certain imperatives associated wi th the spe-

cific good. The entrepreneur most familiar wi th

the good often markets it to firms which have

some likelihood of needing the innovation

(Abratt 1986). Later, periodic adjustments inchannel strategy are tied to market success. If

the market expands rapidly or if many com-

petitors 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 i s through the use of man-

ufacturers’ representatives, viz., an external sales

force distributing the good along with a num-

ber 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 competi-

tors.

Channel strategies require continual adjust-

ment as markets expand geographically, andlarge 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 in-

termediaries. This choice usually depends on a

firm’s cash posit ion (its ability to employ and

reasons for employing i t s own sales force), the

product (need for special service), and the ex-

tent that the market i s growing geographically

(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, handlinglarge and steady customers with an internal sales

force while less explicit, more variable, and small

markets are turned over to distributors.

Geography playsa critical role in channel de-

cisions. When markets are expanding geo-

graphically (given the preexistence of estab-

lished wholesale networks), producers place a

portion of their output with market interme-

diaries to meet the needs of newly emerging

centers of demand (Davis 1989). Because inter-

mediaries have asset-specific knowledge of in-dividual geographic and sectoral markets, they

are the most effective means of addressing the

needs of new users and distant markets. Per-

sistence of wholesale links derives not only from

product characteristics but also from the com-

bined benefits of future sales of new product

introductions. Having out lined aspects of firm

marketing strategies, I now discuss the role of

market intermediaries in the development of

regions.

Mercantilism as a Model ofRegional Development

There i s limi ted geographic literature on the

role of wholesaling in the formation of indus-

trial agglomerations (see Vance 1970; Muller

1977; Fredriksson and Lindmark 1979; Meyer

1980; and Lord 1984 for exceptions). Sparse

mention stems from two views of industrialcomplex organization. The first evolves from a

historic model of industrialization which pre-

sumed that because transportation and com-

munication costs inhib ited long distance link-

ages, producers found jointly in space

exchanged goods among themselves (Marshall

1898).’ The second view focuses on vertically

integrated corporations’ effect on the distri-

bution of material goods. This institutional and

organizational development overshadowed n-

terest in the process of material exchange as aseparate subject of study; it was simply sub-

sumed within the vertically integrated corpo-

ration. Additional geographic inquiries focused

on transportation costs and agglomeration

economies as explanations for spatial cluster-




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). Be-

cause much of geographic inquiry over the lasttwenty years has been oriented toward under-

standing the behavior of large multilocational

corporations, it i s important that we examine

how wholesalers fi t in to this greater organiza-

tional development (Collins and Walker 1974).

The Rise of th e Managerial Corporation

Elsewhere I have writ ten of the historic roleof merchants as traders, producers, and con-

veyors of goods (Glasmeier 1989).* While once

dominant in goods production and distribu-

tion, the wholesalers’ role became more cir-

cumscribed as new institutions absorbed many

of the merchant’s traditional functions (Porter

and Livesay 1971).

The diminished importance of wholesaling s

frequently tied to the emergence of the ver-

tically integrated corporation and mass mar-

kets. With advancements in communicationsand transportation, corporations could profit-

ably internalize the full range of functions, in-

cluding distribution. Firms systematized both

the acquisition of needed inputs and the dis-

tribution of final product. Product and market

factors led to a contraction in wholesaler func-

tions (Chandler 1962; 1966). Wholesalers were

bypassed when they were unable to distribute

the volume of goods produced by manufac-

turers, 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 special-

ized handling or services were required or when

a product’s distribution necessitated specific

capital investments o ensure quality at the point

of consumption. Finally, wholesalers were often

less important in nstances when the final prod-

uct required demonstrable technical knowl-

edge and support both during and after the

sales transaction (Porter and Livesay 1971).

Chandler‘s analysis emphasized both supply

and demand conditions which encouraged

manufacturers to 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 Chandler’s

model of firm evolution has been overgener-

alized which led to the assumption that al l firms

grow large and vertically integrate. Also as used,the model i s inflexible and ultimately static, un-

able to account for the mixed distribution strat-

egies of many firms. Most importantly, it rules

out new industry and firm creation. Chandler

correctly described the rise of oligopolistic

corporations, but his analysis overlooked the

emergence of new industries and centers of

innovation (Jorde and Teece 1989).

I f the role of mass producers had eclipsed

the need for wholesalers, then their numbers

would have surely dwindled. But during thetwentieth 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 em-

blematic of mass production and distribution

often maintain two sales networks: one to sat-

isfy preexisting concentrations of demand and

another to deal with newly emerging markets

(Chandler1966). Finally, in high-tech ndustries,

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 Vance‘s

monograph on the merchant in U.S. regional

development 1970). His mercantile model was

a critique of central place theory’s reliance on

endogenous change leading to higher levels of

regional specialization. Central place theory

could not account for instances where local

production was insufficient t o satisfy local de-

mand. Nor could it contend with the implica-

tions of local specialization and production vol-

umes exceeding local markets. As soon as self-

sufficiency was exceeded, labor specialization

expanded, leading to growth of trading areas.

Industrial specialization was dependent upon

trade. By extending demand through geo-

graphic expansion, specialization could occur,

thus verifying Adam Smith’s seminal dictum.



400 Glasmeier

Time and th e Impulse t o Trade

Ignoring the constraints of t ime and place in

modeling demand and immediate fulfillment

through supply, a mercantile model of regionaldevelopment makes explicit the notion of time

of demand fulfillment. The wholesaler is re-

sponsible 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 periodic ityand matches this

wi th supply from a variety of sources. The geo-

graphic 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 goodstraded or by specializing in traded goods and

expanding hi dher 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

increasesa product's range by delivering a good

to the customer. In concentrating on service

quality, wholesalers benefit customers by spe-

cializing in products and satisfying demand on

a more infrequent basis. Therefore, trade oc-

curs across long distances when a customer is

willing to satisfy need periodically.

The impulse to trade regulates thegeograph-

ic extent of wholesalers. A strong impulse re-

sults in either long-distance trade or frequent

transactions; a weak impulse is characterized

either by short linkages or infrequent trade in-

tervals. This matrix of possibilities knits togeth-

er place and time utili ty and suggests why and

for what types of goods firms use wholesalers

(Vance 1970).

Internalization

The evolution of the space economy based

on trade is a steady process of internalization.

As regions and cities expand, wholesalers com-

pete based on market access and service deliv-

ery. At a certain point it becomes necessary for

wholesalers to extend their geographic pres-

ence into growing markets or risk losing market

share to competitors with better service. While

original wholesale centers persist, new loca-

tions emerge as density of demand warrants.

At first the wholesaler may simply establish a

sales office to respond to firms' information

needs. But eventually i f demand expands ap-

preciably, firms establish a stocking location to

service critical and/or large customers, to ac-

commodate immediate demand fulfillment, and

to make final adjustments in products.

Wholesalers specialize to establish and main-tain high levels of market control. This i s 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 at-

tracted. In very small cities, there i s also oc-

casion for local wholesale stocking t o occur.

This type of trade is usually more industry spe-

c i f ic and transcends issues of scale. Even the

sum of many very small transactions may war-

rant general stocking of goods.Vance's mercantile model draws consider-

able validation from historical literature on the

settlement of the United States. By rejecting

central place theory as rigid, scale-dependent,

and economically deterministic, Vance sug-

gests that intermetropoli tan rade i s a necessary

prerequisite for regional specialization. But his

model i s sketched broadly and does not suffi-

ciently elaborate the ways in which frontier lo

cations are integrated in to a system of cities.

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 ex-

change i s 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 pe-

riodically fill it, considerable economies of scale

exist in the purchase of material goods. To se-

cure 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

wi thin 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 unti l sav-

ings in transaction cost/unit gained by prox-

imity exceeds the higher cost/unit of local

stocking/production (1980, 123). Thus, ini-

tially, entrepreneurs operate from outside a




frontier location, only relocating when local

demand warrants a stocking lo ca t i ~ n. ~

Control of stock originates in the metropol-

itan agglomeration closest to the front ier and

operates over a large area.6 As demand a t thefrontier location grows, local generalized

stocking (by an outside distributor or a local

entrepreneur-distributor) occurs. Meyer notes,

“more specialized entrepreneurs of the origi-

nal stocking location will maintain control of

the fron tier at a higher level of specialization”

(1980,125). As entrepreneurs seek contro l over

stocking in specific geographic areas, the goods

traded must become more generalized and ap-

peal to a broad set of markets. I n this instance,

stocking of general purpose items may be doneby 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) d imin-

ished as they evolved either as separate spe-

cializations or were absorbed within vertically

integrated manufacturing firms. Using the less

specific term, “entrepreneur,” Meyer gener-

alizes the process of integration. In this article,

Iwish to reassert the importance of wholesalers

in the specific context of an expanding space

economy within which the number of cus-

tomers i s increasing rapidly, and the level of

complex specialization is high.

Wholesaler’s Contr ibu tion to New Industrial

Complex Formation

To articulate the role of wholesalers in new

agglomeration ormation, we must consider the

opposite side of marketing’s traditional em-

phasis on sales. I start by making a series of

assumptions which begin with the very earliest

stages of new agglomeration, viz., when an en-

trepreneur invents a product which satisfies an

unfulfilled need. Demand i s nonlocal, and the

new product is specialized; few material inputs

are purchased (the majority are manufactured

in-house). Outside inputs are generally avail-

able, 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

sourcesof demand develop, including new en-

trepreneurs and branch plants. Developments

in new technologies force changes in the com-

position of goods offered by wholesalers, and

information about available new inputs ex-pands local opportunities, thereby increasing

the potential for local specialization.

Modern complexes rarely expand through

entrepreneurial growth alone. Branch plants

went to Silicon Valley once the region became

known for specialized high-tech goods. Simi-

larly, 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, in-tracorporate purchasing policies, and levels of

place and time utility. While these establish-

ments may conduct purchasing through in-

house intermediaries, satisfaction of immediate

needs and the extent of specialization of goods

demanded eventually call forth the use of dis-

tributors, particularly when a product incor-

porates new innovations or is a new innovation

itself.

In the following two sections the evolution-

ary model of industrial complex formation

through a case study of Austin, Texas i s elab-

orated. Ibegin by establishing the historical ba-

s i s of the industrial complex and the role of

wholesalers in the provision of electronic sup-

plies and equipment during a forty-year peri-

od. Thus we explore the contemporary im-

portance of wholesalers in the expanding

regional economy.

Austin, Texas-A Model ofIndustrial Complex Formation

In the mid-1970s high-tech industries be-

came the engine of growth for many southern

and western U.S. cities. Colorado Springs, Col

orado; Austin, Texas; Raleigh-Durham, North

Carolina; Boca Raton, Florida; and Phoenix, Ar-

izona are all identified with the 1980s high-tech

boom. Austin stands out among similar size cit-

ies as having grown rapidly in both population

and manufacturing jobs during the last two de-

cades. As branch plants, high-tech consortia,

and local start-ups greatly expanded the city’s

manufacturing base, Austin received national

(and eventually international) acclaim as the

successor to Silicon Valley.



402 Glasmeier

Austin, the capital of Texas and home of the

University of Texas, i s located in the south-cen-

tral part of the state in the Hill Country. State

government offices and affiliated agencies clus-

ter in he city,forming the economic base. Manystate-sponsored public institutions such as

schools for the learning-impaired are also lo

cated in Austin; there is also a large Air Force

base approximately 15 miles south of the met-

ropolitan 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 t s regional neighbors,

Albuquerque, Phoenix, and Colorado Springs,

Austin‘s recent growth experience has beenspectacular. The city’s 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

a t one point in the 1980s was dubbed the na-

tion’s fastest growing city.

Austin’s economy i s primarily government-

and service-based. These two sectors consti-

tute 49 percent of all non-agricultural employ-

ment. Retai l and wholesale trade make up

another 22 percent, and of all jobs, manufac-turing employment constitutes only 12 per-

cent. While i t s correct that the city’s economy

is not manufacturing-based, between 1980 and

1988, manufacturing job growth was third be-

hind services and trade. Most significantly, dur-

ing the 1970s and into the early 1980s Austin

experienced an annual manufacturing growth

rate of 8.3 percent (compared with the nation’s

meager 1 o 2 percent). Between 1977 and 1982,

manufacturing job growth increased 63 per-

cent, second only to Colorado Springs which,

with a much smaller base, increasedby 86 per-

cent.

Throughout the last twenty years, high-tech

manufacturing has led Austin’s economic ex-

pansion, while the city’s economy i s 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 em-

ployers 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.

With the additionof numerous branch plants

in conjunction with the creation of locally

owned firms, Austin has become one of the

largest centers for the manufacture of semi-

conductor devices outside of Silicon Valley. Al-most 15 percent of Motorola Inc.’s domestic

semiconductor employment i s now located in

Austin. Advanced Micro Devices (AMD) locat-

ed 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.

Historyof High-Tech Manufacturing i n 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 oi l wells in offshore

dril ling operations (Susbauer 1972). The U.T.

Physics Department was an early incubator ofnumerous small instrumentation firms. Pre-

vious researchers have speculated that the in-

dustry‘s connection with physics, as opposed

to engineering, partially explains why instru-

ments formed the base of Austin’s nascent high-

tech economy (Fig. 2).

Similar to a number of other high-tech lo-

cations, defense-related research provided

another early source of support for Austin’s

high-tech industry growth. The Tracor Cor-

poration, Austin‘s only home-grown Fortune500 company, began in 1954asa consulting firm

which merged with another local firm to be-

come a defense-related high-tech manufac-

turing corporation. Mapping new firm forma-

tions in early Austin underscores he ties among

companies thought to have spun off from Tra-

tor (Fig. 3).

The base of the early Austin technology com-

plex relied on small firms. Almost twenty years

passed before a branch plant of a large national

corporation ocated in the city (Susbauer 1972).

The first major branch plant siting of a large

national firm (IBM) occurred in 1968. IBM’s jus-

tification for locating a typewriter manufactur-

ing plant i n Austin was to facilitate access to

the growing southwestern market. From the



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404 Glasmeier

Continuum (from 1969

Carbomedics

BDM

Abbott Labs

AMD Lockheed

Instruments IBM Data Corp. Motorola Data General W.L. GoreHouston Control

I I

TRACOR(Associated

Consultants andEngineers ->

Texas ResearchAssociates)

1955

I

JohkonControls

1960 1965 1970 1975 1980

Austron Texas Radian Espey Eagle Signal McNeil

Tektronix z znstruments Huston

Burroughs

1985

MCC

Martin Decker

bold type indicates “Home-grown” companies ROLM

Fisher Controls

Figure 3. Developmentof 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. Austin’s second major

branch plant siting occurred a year later when

Texas Instruments Corporation built a plant to

manufacture office products and desktop com-

puter equipment. Four years passed before a

third national corporation, Motorola, opened

i t s semiconductor wafer fabrication facility on

the east side of the city. The Ed Bluestein plant

i s Motorola’s most highly integrated fabrication

location, employing device R&D, advanced en-

gineering, and pro totype capacity.

Between 1974 and 1984, Austin received

another twelve branch plants of firms head-

quartered 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 es-

tablished a major defense research and devel-

opment facility. Other major Austin branch

plant locations include Advanced Micro De-

vices, 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 f i rst 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 manu-

facturing branch plants and locally grown firms.

In 1983, with the announcement that the Mi-

croelectronics and Computer Corporation

(MCC) had selected Austin as i t s headquarters,

both the city and the state’s aspirations as cen-

ters of high-tech industry seemed assured. A

multifirm consortium, MCC s conducting col-

laborative research on computer, software, and

manufacturing process design and develop-

ments. Twelve firms working as a team created

the research facility, the first to pursue com-

mon research goals in combating international

computer and microelectronics competition.

Today seventeen firms participate in the con-

sortium.

Austin Today

The heady days of successive branch plant

announcements have passed. From 1985-90,

Austin’s electronics and computer industry ex-

perienced a slump. Although occasional whis-

pers of possible new plant sitings are s t i l l ov-

erheard, 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 sus-

tained. With the 1988 announcement that Aus-



406 Clasmeier

and diversification, it i s evident that firms op-

erate autonomously with the assistance of in-

formation flows in the form of catalog sales,

manufacturers representatives, and merchant

wholesalers which bring information into a na-scent complex and spread the word of local

firm offerings outside the immediate market

area.

The Spatial Evolution ofWholesaling: A n Empirical

Example

This section explores the validity of a mer-cantile model of regional formation through an

analysis of the history of wholesale electronic

development within the c i t y of Austin. A re-

statement of the theory suggests that whole-

saling beginsas a service providing generalized

inputs, sustained through sales responding to

a variety of markets. Over time, as the level of

local materials demand increases and the com-

plex evolves, wholesale specialization occurs.

Eventually wholesalers from the closest ag-

glomeration sell into the complex. Simulta-

neously, in response to this encroachment from

outside, original wholesalers broaden their

product line and serve a more general clien-

tele. Thus a pattern unfolds in which whole-

saling begins wi th local firms, followed by

regionally and eventually nationally headquar-

tered wholesalers. In the long run, local mer-

chant 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 an-

ecdotal documentation to 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 do-

mestic equipment to trade in electronics goods.

Prior to the early 1940s, sales of parts for elec-

trical goods were accomplished primarily

through firms which performed sales and ser-

vice. For example, Sears, Roebuck stocked spare

parts inventory in their retail outlets as well asoffering parts for home and commercial ap-

pliance repair i n their mail order catalogs.

The early formation of electronics wholesal-

ing 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, andmaintenance. By the mid-I950s, the c i ty had

five wholesalers (Table 1 .One firm, White In-

struments, wholesaled parts for other instru-

ment manufacturers as well as for i t s own use.

And in 1957 the Motorola Corporation opened

an electronics parts and service office provid-

ing equipment and parts for television and ra-

dio electronics applications.

Prior to the 1960s electronics wholesaling was

quite general, providing parts and accessories

for equipment repair to a wide variety of in-dustries. 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 indus-

try. In these early days local wholesalers kept

pace with changes in industry by broadening

their product lines rather than further special-

izing i n specific sub-industries.

By the early 1960s wholesale operations be-

gan to specialize with separate operations for

radio and television repair, electronic parts dis-

tribution, and maintenance and repair opera-

tions for commercial firms. Improvements in

air conditioning, complex building systems, and

the needs of the city, university and state gov-

ernment 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 submar-

kets emerged and attracted wholesalers head-

quartered outside the region (Table 2 Fig. 5).

In 1963 the first nonlocal firms listed exchange

numbers (the precursors to 1-800 toll-free

numbers) o sell wholesale electronic parts. One




Table 1. Number of Electronics

Wholesalers, 1950-87

Nonlocal Nonlocaldistrib- phone National

Total utors numbers firms

1950

1955

19601965

1971

1975

1980

1985

1988

1

5

615 6 5 l a

13 6 6 3’

19 13 10 1,2‘

40 15 11 5

52 20 10 9

50 18 12 7

Source: Southwestern Bell, Austin telephone directory, se-

a indicates national firm with toll-free number.

lected years 1950-88.

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 na-

tional 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 non-

local wholesalers bought up Austin companies.

As the large firms began to dominate wholesale

trade, it became increasingly dif ficult for small-

er, local firms to survive. About this time elec-

tronics manufacturing firms headquartered

outside the local area in Dallas, Houston, Cal-

ifornia, and Oregon (e.g., Hewlett-Packard and

Textronix) also began advertising in the yellow

pages. M a n y out-of-town and out-of-state firms

operated sales offices rather than manufactur-

ing 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 city’s

wholesale base was dominated by nonlocal

firms, some of whom established local ware-

houses while others simply listed toll-f ree num-

bers 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

Table 2. Location of Out-of-town

Distributors Listing Toll-free Numbers in

Austin, 1965-88

1965 1971

San AntonioHouston(2)Dallas(2)

1975

Dallas(2)Plano, TX

HoustonHauppauge, NYPhiladelphia

1980

Plano, TXHouston(3)Hauppauge, NYDallas(2)Van Nuys, C A

Stafford, TXFort Worth

1985

Plano, TXDallas(2)Addison, TXShreveport, LAHouston (2)

Dayton, OHVan Nuys, C AFort WorthNew York

1988

Plano, TX 3)Brownsville, TXDallasChannel View, TX

Dayton, OHVan Nuys, C AFort Worth (2)

Plano, TX (6)Dallas 2)Stafford, TXSan AntonioVan Nuys, C AFort Worth

. .Source: Southwestern Bell, Austin telephone directory, se-

lected years 1965-1988.

the decade, seven national wholesalers had es-

tablished either a sales office or a warehouse

in Austin. Of 42 electronic wholesalers, more

than half were single location operations.

The city’s base of high-tech manufacturers

and wholesalers grew in lock-step th rough the

1980s. The presence of wholesale firms head-

quartered outside the city remains strong de-

spite corporate and terri toria l reorganizations

which have led t o the closings of warehouses

and the consolidation of stock in a few regional

facilities.

An Empirical Example of

Contemporary DistributionRelationships

Based on circumstantial evidence, have sug-

gested the importance of wholesalers in the

early formation of the Austin complex. The



to8 Clasmeier

Table 3. Regional and National Wholesale Firms with Local Branches and Parts Producers with

Sales Officesa

1964 1977 1981

Hall-mark Electronics Sterling Electronics Arrow ElectronicsHdq., Dallas Hdq., Houston Hdq., Melville, NY

1969 1978

Newark Electronics

Hdq., ChicagoCorp.

1974

Schweber Electronics

Owned by Lex Elec-

Hdq., London

1976

Inc.

tronics

Berg Electronics Div.of Dupont

Hdq., Delaware

Norvell ElectronicsHdq., Dallas

Hamilton-AvnetHdq., New York

1979

Southwest Electronics

Hdq., San Antonio

1980

AltairCo

Hdq., Richardson, TX

Pioneer ElectronicsHdq., Cleveland

a Fairchild Serni-conductors

a CTE Micro Circuits

Kent ElectronicsHdq., Dallas

1982

Kierulff ElectronicsOwned by DucomrnunHdq., Cypress, CA

1984-85

a NEC Electronics

1988

Wyle LaboratoriesHdq., irvine, CA

Time ElectronicsHdq., New York

Source: Southwest ern Bell, Austin telepho ne directory , selected years 1964-88.a Sales offices of national and mult inatio nal manufactu rers.

evolution of the complex has been traced by

examining, over a concurrent period, changes

in wholesaling and increases in high-tech man-

ufacturing(Tab1es 1and 4). The complex’s initial

requirements for electronic inputs were prob-

ably 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 i n 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 high-

tech economy i s evident.

Generalizationscan be made about the prob-

ability of distributor usage based on industrial

linkage theory, bu t results presented earlier in-

dicated that the majority of firms, regardless of

industry, used a mixed channel strategy to dis-

tribute their products. Referring to Figure 1, i t

is also obvious that firms in the electronics in-

dustry used outside distribution agents with

great frequency. Examination of the distribu-

tion trade literature and interviews with whole-

sale distributors further indicate that distribu-

tor usage i s rising. The advancing speed of

product life cycles, heightening international

competition, expanding geographic markets,

and growing importance of small firms all im-

prove the probability that firms will use dis-

tributors 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 de-

mand remains insufficient to warrant local pro-

duction). Furthermore, it has been established

by others that high-tech product markets are

almost exclusively nonlocal. Therefore antic-

ipate that most manufactured goods are not

destined for consumption within the complex.

Accordingly, the fol lowing research results are

an initial attempt to identify the contemporary

importance of wholesalers in a newly forming

complex. In more mature complexes, the fre-

quency and scale of demand have presumably

precipitated the development of local manu-

facturing capacity of some material inputs.

Nevertheless, anecdotal evidence from nation-

al distributors indicates that even in mature

complexes, distributor usage is high.




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

Sample Description

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 refer-

ence, 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

local sample by adding firms which had not

participated in the state survey.

Sample Construction

This study focuses on high-tech products in

the electronics, communications, aerospace,

computers, instruments, and medical equip-

ment industries.A total of 126 firms were iden-

tif ied for interview. Seventeen were eliminated



410 Glasmeier

Figure 6. Regional and national firms that estab-lished local branches and parts producers hat openedsales off ces.

because they did not manufacture a product

with an SIC code corresponding to a 3-digit

industry category l isted in Table 5 and another

six were excluded because their major product

was a service. Of the manufacturing firms ex-

cluded, more than half were chemical com-

panies. The remainder comprised a broad group

of general manufacturing inputs such as plast ic

parts, rubber molding, and miscellaneous metal

parts.

Table 4. Number of High-Tech

Manufacturers, 1950-87

Year Firms Year Firms

19501952

1954

1956

1958

1960

1962

1964

1966

1 1969 302 1973 37

1 1976 53

2 1978 52

5 1979 61

10 1981 82

1982 110

1983 77

21 1986 110

Source: This table combines the firms listed in the local

telephone directory with those listed in the Texas Manufac-

turers Guide, Bureau of Economic Research, University of

Texas, Austin, 1986.

The universeof firms was reduced to 103.Of

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 circum-

stance. Nine firms refused to be interviewed.

Five companies were no onger in business, and

an additional six were misclassified; they didnot fal l into the prespecified industry cate-

gories.

Examination of the firms that did not answer

the survey reveals that they were on average

smaller than those that did respond.* The di-

vergence s explained by a higher response rate

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 n o significant ownership bias in the

firms that failed to respond.

General Characteristicsof Firms in th e Study

The group of firms studied i s dominated by

small, locally owned firms a t least five years old.

Companies are concentrated in three sectors:

electronics, scientific instruments, and com-

puters. 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




Table 5. Industrial Classification of Firms

Interviewed and the General Population YO)

Sample Population

SIC 28 5 4SIC 35 13 9

SIC 36 39 53

SIC 37 1 1.6

SIC 38 32 31

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

employees. Sixty-four percent indicated that

10 percent or more of their workforce was

comprised of engineers and technicians.

As found i n studies of other high-tech in-

dustry concentrations, the market for Austin

firms' goods i s decidedly nonlocal (Oakey 1984;

Goldstein and Mal iz ia 1985; Hagey and Malecki

1986; Gordon et al. 1988; Porterfield 1988). For-

ty percent indicated their markets were locat-

ed entirely outside the local area. Another 45

percent sold less than 15 percent of their out-

put 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, grouped inputs in to five cat-

egories: unfinished materials (suchas 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 process-

ing, were especially pure, or required sophis-

ticated 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, mill-

ing machines). Each respondent was prompted

about distinctions between high and low-tech

inputs and each gave an example of what con-

stituted high and low-tech inputs to hidher

firm. Whi le not clear-cut i n 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 identif ied (Table 6). In general, firms pur-

chased litt le 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 manufac-

turing high-tech inputs locally. Low-tech in-

Table 6. Percentage of Inputs Purchased

from Local Manufacturing Firms

Percent-

InDut of firms

age

Raw materials 70

High-tech inputs 56

Low-tech inputs 50

High-tech services 56

Production equipment 67

Satisfied

locally

<20

<20

<20

<20

<20

puts were bought with slightly higher frequen-

cy (50 percent of local firms purchased ess 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 va-

riety 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 equip-

ment 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 link-

ages reveal there are alternative solutions for

acquiring inputs. As markets become more ex-

tensive and corporations develop increasingly

complex divisions of labor, market intermedi-

aries gain importance. Beyond acquisition of

inputs and reduction of transaction costs, firms

use them for strategic reasons. Thus pertinent

considerations include: how do distributors

operate in a local economy? what types of in-

puts do they provide? and how does knowl-

edge of distr ibution theory enhance our un-

derstanding of interfiim transactions?

Distributo r Use for Mater ial Input

Acquisitions

To determine and explore their uses of dis-

tributors, firms were asked whether and for

what inputs they used distribution channels.

Specifically we questioned whether they pur-

chased 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 pur-

chase, survey questions pertaining to the ac-

quisition of capital equipment were eliminated.



412 Glasmeier

Table 7. Acquisition of High-Tech Inputs

Number

DistributorFactory directTotal

35

9

44

By location of headquarters

Nonlocal Local Tota l

Distributor 7 (63.6 ) 28 (84.8 ) 35

Factory direct 4 (36.4 ) 5 (15.2 ) 9

Column 11 33 44

Chi-square 2.28148 Significance 0.1309

By size of firm

Small Large

(1 100) (101+) Total

Distributor 24 (80.0 ) 11 (78.6 ) 35

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

1-5 6-20 21-33 Total

Distrib-

Factory-utor 11 (84.6 ) 17 (70.8 ) 7 (100.0 ) 35

direct 2 (15.4 ) 7 (29.2 ) 9

Column 13 24 7 44Chi-square 3.12495 Significance 0.2096

Office supplies and equipment are purchased

much more regularly, so we substituted ques-

tions 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 head-

quartered and nonsubsidiary firms used dis-tributors than did their nonlocal brethren.

Although the percentages differed signifi-

cantly, the majority of firms, regardless of char-

acteristics such as size, age, or location, used

distributors to secure both high and low-tech

inputs (80 and 64 percent respectively). Dis-

tributors were used to purchase high and low-

tech inputs for both small and large firms

(Tables7 and 8). Although both locally and non-

locally headquartered firms purchased from

distributors, the locally headquartered com-

panies were more likely t o use distributors for

Table 8. Acquisition of Low-Tech Inputs

Number

DistributorFactory directTota l

23

13

36

By location of headquarters

Nonlocal Local Total

Distributor 4 (57.1 ) 19(65.5 ) 23

Factory direct 3 (42.9 ) 10 (34.5 ) 13

Column 7 29 36


By size of firm

Small Large(1 100 (101+) Total

Distributor 16 (72.7 ) 7 (50.0 ) 23

Factory direct 6 (27.3 ) 7 (50.0 ) 13

Column 22 14 36


By age of firm in years

1-5 6-20 21-33 Total

Distrib-

Factoryutor 6 (75.0 ) 12 (57.1 ) 5 (71.4 ) 23

direct 2 (25.0 ) 9 (42.9 ) 2 (28.6 ) 13

Column 8 21 7 36Chi-Sauare 1.01481 Significance 0.6021

both types of inputs than their nonlocal coun-

terparts. 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 tabu-

lation of. this relationship indicates there i s 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 factory-

direct with greater frequency than they do high-

tech 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 stat ist ical ly significant difference between the

percentages of high and low-tech goods man-

ufactured locally. Respondents indicated that

the low-tech goods they purchased were man-




ufactured locally more often than were high-

tech 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 i s produced by rel-

atively few large firms. Factory-direct pur-chases are no doubt made by large corpora-

tions 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 i s nec-

essary t o establish distinctions between goods

produced locally and those purchased hrough

intermediaries.

I originally anticipated that the use of dis-

tributors would vary basedon the type of prod-

uct and the age, ownership, and size of estab-

lishment. 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 ndicated that

regardless of the share of purchases made lo

cally, firms used distributors for the acquisition

of inputs.

A shortcoming of this analysis i s that we did

not determine the dollar value of all inputs pur-

chased through distributors. While a great vol-

ume of material may be purchased through

these intermediaries, it is st i l l possible t ha t crit-

ical (high-value) inputs are purchased factory-

direct. Respondents were asked what per-

centage of their input purchases consisted of

goods manufactured locally. For the residual

input, we asked what percentage was pur-

chased factory-direct and what percentage was

acquired through a distributor. On the basis of

the original study, we cannot definitively in-

dicate the quantitative importance of distrib-

utor linkages.

A follow-up study currently underway will

determine what percentage of inputs byvalue)

are purchased through distributors. Quantita-tive information about the percentages of in-

puts 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 pur-

chased through distributors and the use of dis-

tributors with stocking locations in Austin. Pre-

liminary results support the assertions of the

implied importance of distributors examined

here. As this second study i s incomplete, I can-

not make quantitative generalizations about theresults, nor can I discern purchases made be-

tween local and nonlocal distributors. None-

theless, survey results are important first indi-

cators 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

illustrates he importance of interregional trade

in new industrial complex formation. This re-

lationship 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 origi-

nating outside a region. Because the existing

literature is dominated by the vertically inte-

grated firm presumed to internalize distribu-

tion functions (obviating the importance of ex-

ternal distribution channels), trade agents have

gone largely unnoticed. But the development

of new industries, expansion of sectoral and

geographic markets, and the growing impor-

tance of entrepreneurial firms all establish the

need to consider distribution channel structure

when analyzing industrial linkage formation.

Of equal importance is the geographic ex-

pansion of the wholesale function. These re-

sults validate insights found in both Vance's and

Meyer's early treatments of wholesaling and

regional development. In particular, the evo-

lution 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

came a profitable location for national whole-

salers. Eventually, by offering superior service

and variety, national and regional wholesale

firms came to dominate the area’s high-tech

wholesale market. Local firms retreated to verygeneral and mostly nontechnical product lines.

This study also confirms Meyer’s original hy-

pothesis about the progression of wholesaling

developing across regions. (Initially a whole-

saler’s reach stretches from an agglomeration

to a frontier location, in this case from San An-

tonio 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 ini-

t ia l proximity.A mixed channel strategy i s the dominant

sales structure of manufacturing firms. Few en-

joy the luxury of dealing directly with original

equipment man ufac u r ers (OEMs). Both t ime

and place constraints often prohibit factory-

direct transactions. While we might correctly

assume that large incorporated firms pursue a

rational material acquisition strategy, purchas-

ing policies of small firms and newly established

enterprises often border on chaos and exhibit

limi ted premeditation. More mportantly, smallfirm order size i s 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 indus-

trial 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 i s 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 suchas mold making,

metal fabricating, etc. as following the pattern

(1988). This analysis does no t deny the impor-

tance 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 prob-

lem. The interplay of demand for goods man-

ufactured outside and those traded-in facili-

tates the demand for local production of

standardized goods. The transactions cannot

be viewed in isolation. They must be consid-

ered jointly to explain the diversity of produc-

tion experiences found i n different locations.The persistent importance of wholesalers in

the local economy simply underscores he 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 ask-

ing whether a good i s purchased ocally. As this

analysis has attempted to demonstrate, the an-

swer 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 acknowledgethat new production mandates call for increas-

ing use of distributors (as firms attempt to im-

plement JIT inventory practices).

It is also critical t o understand the choices of

distribution channels selected by firms over thelives of bot h he product and the firm. We must

delve further in to the workings of firms to dis-

cover how they select and then carry out their

marketing strategies. Here Ihave suggested dis-

tributors’ importance in the early formation of

a complex. I have stressed the fact that as someform of industrialization takes hold in a local

economy, wholesalers are attracted to service

new specialized needs. S t i l l unexplored i s the

role of distributors in the evolution and even-

tual integration of complexes over time. For

example, are wholesalers only important in the

absence of prior industrialization? Anecdotal

evidence from Pittsburgh, a former industrial

c i t y which aspires to become a high-tech cen-

ter, suggests initial aspirations are not being met

with the formation of local manufacturing link-

ages. Instead the c i t y i s the recipient of sales

offices and wholesale distributors of high-tech

manufactured goods. O n the basisof the results

reported here, the first stages of industrial de-

velopment may quite regularly consist only of

trading agents who would eventually be ac-

companied 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 produc-

tion relations unfold.

New industrial complex formation i s expe-

dited by the activities of market intermediaries.

While it might be appropriate to view major

complexes and longstanding agglomerationsas

self-contained systems, some of their suste-




nance i s clearly determined by firms’ abilities

t o reachout to ne w econ omic centers. Th roug h

examination of the complex interplay between

existing and ne wly for mi ng agglomerations, w e

can enhance our understanding of the evolu-t ion of th e space economy.

Acknowledgments

The author would like to thank the University Policy and Research Institutes of the University of Texas

a t Austin for support of this research. Students n he

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 comple-tion of this project. The author wishes to thank Amy

K. Teran for substantive discussions and editorial as-

sistance during the various phases of the manuscript’s

life. The author would also like to thank the reviewers

who provided invaluable criticism of earlier drafts,

and whose comments greatly strengthened the the-

oretical argument. Finally, special thanks to Bennett

Harrison, FIavia Martinel li, Erica Schoenberger, Mor-

gan Thomas, William Beyers, Mary Beth Pudup, and

Barney Warf for comments on earlier versions of this

paper. As always, any and all omissions are attribut-

able to the author.

Notes

1. But as Hoare 1985) notes, these historic studies

(i.e., Wise’s 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 al l

firms had any local linkages whatsoever.

2. Wholesale establishments increased 43 percentbetween 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 im-

portance of merchants in the spatial organization

of production in Paris 1985). lntrametropolitan

clusters of households producing highly divisible

goods, suchas silk flowers, came together in space

for the convenience of the merchant. Harvey ar-

gues 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 pro-

duction; as long as local consumption is less than

sufficient to support local production, then ex-

change with producers from outside is efficient.

5. The degree of specialization may be determined

by demand a t the origin of the wholesaler and not

a t the frontier location.

6. The extent that a firm relies on internal manufac-

tur ing versus off -the-shelf parts buying depends

fundamentally on product type. If the product is

a n assembly of off-the-shelf components such as

a computer, then a firm will buy the parts needed

and assemble the good. But i f the product s highlytailored 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 organi-

zation has power t o enforce a firm’s response to

inquiries. Thus, there is no effective mechanism

for developinga complete directory of firms. Oftenlocal and state guidebooks are based on imprecise

collection methods which resort to such sources

as word-of-mouth or new firm announcements n

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 n the telephone directory yellow

pages. This means that some small establishments

that may not be able to afford the costs of adver-

tising 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 er-

roneously classified as manufacturers when they

are in fact manufacturers’ representatives, distrib-

utors, or consultants. As partial compensation for

this potential bias, firms which do advertise in the

phonebook are more likely to sell their goods lo-

cally or a t least want to have a visible local pres-

ence.

Another problem wi th local data sources is dif-ficulty 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, es-pecially when trying to establish a measure of the

universe of firms.

8. Contact the author for further details about the

sample characteristics.

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