Organizations that produce similar goods tend to concentrate in the same geographic area (geographic concentration of production). Economic explanatio...
GMAT Reading Comprehension : (RC) Questions
Organizations that produce similar goods tend to concentrate in the same geographic area (geographic concentration of production). Economic explanations of such industrial agglomeration explicitly emphasize better performance, and implicitly emphasize lower failure rates, as the key processes contributing to this geographic concentration. Sometimes industries benefit economically from situating themselves in particular locations that offer intrinsic advantages such as access to scarce raw materials or proximity to consumers. In other cases, regardless of the particular location, the colocation of structurally equivalent organizations—those that operate in the same markets—may itself yield advantages such as common labor markets and knowledge spillovers.
Sorenson and Audia point out that these explanations ignore the fact that structurally equivalent organizations also compete with one another for vital resources, and colocation would be expected to increase such competition. Organizational ecology studies support this expectation by showing that organizations apparently compete more intensely within local population boundaries.
Sorenson and Audia propose instead that what maintains geographic concentration is entrepreneurial opportunity, which leads to higher founding rates. Dense local concentrations of structurally equivalent organizations increase the pool of potential entrepreneurs in a region. Beginning entrepreneurs need exposure to existing organizations in the industry to acquire knowledge of the business, ties to scarce resources, and self-confidence. The existing geographic concentration of production constrains access to these resources, so that new foundings tend to reinforce geographic concentration.
It can be inferred from the passage that Sorenson and Audia's argument differs in part from the economic explanations mentioned in the highlighted text in that Sorenson and Audia claim that
1. Question Analysis:
The question asks us to identify how Sorenson and Audia's argument differs from traditional economic explanations. We need to find what Sorenson and Audia claim that contradicts or differs from the economic theories mentioned earlier in the passage.
Connecting to Our Passage Analysis:
From our progressive analysis, we identified a clear contrast between two theoretical approaches:
- Traditional economic explanations (sentences 2-4): Focus on how clustering helps existing companies perform better and fail less often through location advantages and proximity benefits
- Sorenson and Audia's theory (sentences 5-10): Argues that clustering persists because it creates entrepreneurial opportunities leading to higher founding rates of new companies
The key insight from our analysis is that Sorenson and Audia shift focus from existing company performance to new company creation as the mechanism that maintains geographic concentration.
Prethinking:
Based on our passage structure analysis, Sorenson and Audia's main contribution is proposing that "what maintains geographic concentration is entrepreneurial opportunity, which leads to higher founding rates." This directly contrasts with traditional explanations that emphasize better performance and lower failure rates of existing companies. The correct answer should capture this fundamental difference in explaining what maintains clustering - new company creation versus existing company performance.
Why It's Wrong:
- Sorenson and Audia don't argue that lower failure rates aren't a result of better performance - they argue that performance benefits aren't what maintains clustering
- Their focus is on founding rates and entrepreneurial opportunity, not on the relationship between performance and failure rates
- This mischaracterizes their argument as being about the connection between performance and failure rather than about what drives clustering
Common Student Mistakes:
- Did you think Sorenson and Audia were critiquing the relationship between performance and failure rates?
→ Focus on what they say maintains clustering (entrepreneurial opportunity) versus what traditional theory says maintains clustering (performance benefits) - Did you confuse their criticism of traditional explanations with their alternative explanation?
→ Their criticism is about ignoring competition; their alternative focuses on founding rates
Why It's Right:
- This directly captures Sorenson and Audia's core argument that differs from traditional economic explanations
- Traditional explanations focus on better performance and lower failure rates of existing companies
- Sorenson and Audia propose that clustering persists because of higher founding rates driven by entrepreneurial opportunity
- This represents a fundamental shift from explaining clustering through existing company benefits to explaining it through new company creation
Key Evidence: "Sorenson and Audia propose instead that what maintains geographic concentration is entrepreneurial opportunity, which leads to higher founding rates."
Why It's Wrong:
- Sorenson and Audia don't compare the importance of access to scarce resources versus proximity to consumers
- Their argument is about entrepreneurial access to resources (knowledge, ties, confidence) rather than organizational access to raw materials or consumers
- This choice confuses their focus on entrepreneurial resource needs with traditional location-based resource advantages
Common Student Mistakes:
- Did you see "scarce resources" and think it connected to Sorenson and Audia's mention of resources?
→ Note that they discuss entrepreneurs' need for "ties to scarce resources," not companies' access to raw materials - Did you think this was about comparing different types of location advantages?
→ Sorenson and Audia's argument isn't about which location advantages are better, but about entrepreneurial opportunity as the clustering mechanism
Why It's Wrong:
- This is something traditional economic theory already acknowledges - the passage mentions "structurally equivalent organizations—those that operate in the same markets"
- Sorenson and Audia's point is that traditional explanations ignore the competitive aspect, but the fact that companies compete for consumers isn't their unique claim
- Their distinctive argument is about competition for vital resources increasing with colocation, not about market competition
Common Student Mistakes:
- Did you focus on Sorenson and Audia's criticism rather than their alternative explanation?
→ The question asks how their argument differs, which requires focusing on their entrepreneurial opportunity theory - Did you think competition for consumers was their main point?
→ Their concern is broader competition for "vital resources," and their solution focuses on entrepreneurial opportunity
Why It's Wrong:
- This describes traditional economic explanations, not Sorenson and Audia's different approach
- The passage explicitly states this as part of what traditional explanations emphasize: "particular locations that offer intrinsic advantages"
- Sorenson and Audia's theory focuses on entrepreneurial opportunity regardless of intrinsic location advantages
Common Student Mistakes:
- Did you mistake this for something Sorenson and Audia argue?
→ This is actually part of the traditional view they're providing an alternative to - Did you confuse the different explanations presented in the passage?
→ Reread the passage structure: traditional explanations first (including intrinsic advantages), then Sorenson and Audia's alternative