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.
