the role of location in the marketing strategy of performing arts organizations

Table of Contents Page 2.1 Traditional Regional Development Theories 11 2.2.1 Agglomeration economies and clusters 19 2.2.2 Localization and urbanization economies 22 2.2.3 Creative e

The Role of Location in the

Marketing Strategy of Performing Arts Organizations

By

Christine A Lai

October, 2006

A dissertation submitted to the Faculty of the Graduate School of the

State University of New York at Buffalo in partial fulfillment of the

requirements for the degree of

Doctor of Philosophy

Department of Geography

UMI Number: 3244223

3244223 2007

Copyright 2007 by Lai, Christine A.

UMI Microform Copyright

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by ProQuest Information and Learning Company

My thanks to my committee members, Dr James McConnell and Dr Alan

MacPherson who contributed insight to my research by offering useful comments at the preliminary stage of my research and for the knowledge they imparted during the

coursework stage of my studies

The following professionals provided invaluable guidance The insight and knowledge of the performance arts industry of Randall Kramer played a key role in the development of my survey instrument, the foundation of my study Dr Peter Rogerson’s assistance with statistical testing subject matter is significantly valued I would also like

to thank my friend and colleague Dr William DiPietro for his support and for serving as

my sounding board as I verbally organized ideas

On the personal level, I would like to express my sincere gratitude to my family for their patience and support throughout this entire process I dedicate this work to them: to my children Daniel, Kimberly, and William, whose drive for academic

excellence inspired me to continue with my studies, and my supportive husband Sek Hong for his love and encouragement

Table of Contents

Page

2.1 Traditional Regional Development Theories 11

2.2.1 Agglomeration economies and clusters 19

2.2.2 Localization and urbanization economies 22

2.2.3 Creative economies and human capital theory 28

3.3 Background of Nonprofit Performance Arts Organizations 37

3.4 Location Preferences of Nonprofit Organizations 39

5 Respondents’ Profile, Analysis, and Discussion 66

5.1 Characteristics of Nonprofit Performing Arts 66

5.2.1 Summary of Results from Research Question #1 95

5.4 The Arts and Regional Development 116

5.4.1 Summary of Results from Research Question #3 128

List of Tables

Table 1.1: Industrial Employment Statistics among cities in

Northeastern and Midwestern United States 7

Table 1.2: Occupational Employment Statistics among cities in

Northeastern and Midwestern United States 8

Table 4.1: Population Size of Performance Arts Organizations 52

Table 4.3: Pearson Chi-square Test for Non-response Bias 57

Table 4.4: Independent Samples Test for Non-response Bias 57

Table 5.1: Response rate distributed over 63 Organizations 67

Table 5.3: Years Organization had been established 69

Table 5.4: Description of Types of Organizations 70

Table 5.6: Distribution of Organization’s Mission 72

Table 5.7: Distribution of Ranked Organizational Activities 74

Table 5.8: Distribution of Annual Attendance 75

Table 5.10: Full-Time paid Organization Staff 77

Table 5.11: Part-Time paid Organization Staff 77

Table 5.12: Volunteer Staff in Organization 78

Table 5.13: Importance of Metropolitan Area Location Factors 81

Table 5.14: Factor Analysis: Component 1 (Localization Economies) 83

Table 5.15: Factor Analysis: Component 2 (Urbanization Economies) 85

Table 5.16: Factor Analysis: Component 3 (Institutional Support) 86

Table 5.17: Factor Analysis: Component 4 (Local Talent) 88

Table 5.18: Factor Analysis: Component 5 (Market Conditions) 89

Table 5.19: Location of Organization Performance Facility 93

Table 5.21: Accessibility to Organization 95

Table 5.22: Cronbach’s Alpha for Locational Factor Analysis Components 101

Table 5.23: Location Variables and Revenue Concentration Index 102

Table 5.24: Organization Single Performance Ticket Price 103

Table 5.25: Organization Season Performance Ticket Price 104

Table 5.26: Organization Purchasing Options Offered 104

Table 5.27: Factor Analysis on Product 106

Table 5.28: Product Variables and Revenue Concentration Index 107

Table 5.29: Most Effective Adverting Media for Organizations 107

Table 5.30: Source of Reputation 109

Table 5.31: Advertising & Promotion and Revenue Concentration Index 110

Table 5.34: Regression Results of Reduced Model 115

Table 5.35: Share of Inter-organizational Relationships Among PAOs 117

Table 5.36: Organization Patrons that are Residents of SMA 121

Table 5.37: Organization Performers that are Residents of SMA 122

Table 5.38: Organization Technical Staff that are Residents of SMA 123

Table 5.39: Organization Administrative Staff that are Residents of SMA 124

Table 5.40: Percentage of Organizations Hiring/Receiving Producer Services 125

Table 5.41: Total Local Donated Services versus Total Local Paid Services 127

Table 5.42: Total Local Paid Services versus Non-local Paid Services 127

List of Figures

Figure 5.1 Location Variable Factor Analysis Scree Plot 83

This dissertation seeks to determine the relative importance of location in the marketing strategy of non-profit performing arts organizations (PAOs) Recent marketing and arts organizational research has shown that PAOs' marketing practices are shifting from product development to audience development While product development and promotional strategies are important marketing variables, location selection has become

an important strategic factor for the arts industry Yet very little research has been done

on the locational dimensions of this industry Based on a mail survey of PAOs in six second tier U.S statistical metropolitan areas (SMAs), this paper will investigate: (i) the attributes that explain the location of PAOs in the SMAs (that is, Buffalo, Pittsburgh, Cleveland, Columbus, Cincinnati, and Milwaukee) and (ii) the extent to which location influences the success of PAOs All six SMAs have a population range of 1 million to 2.5 million While they are located in a region that has witnessed a decline in manufacturing activities, the cities however are relatively rich in cultural and arts activities

To test the relative strength of location attributes influencing the success of the PAO, a revenue concentration index was created and used as the dependent variable in a multiple regression analysis This model reveals that location does indeed play a

significant role in the success of PAOs particularly with regards to affordability and abundance of arts industry specific labor

In addition to benefiting from arts industry specific labor, PAOs have access to and support surrounding producer services such as accounting, law, advertising, and web page creation, indicating the PAOs gain from urbanization economies Collaboration with peer PAOs and other institutions such as universities, foundations, and corporations appear to be essential to building audience support and acquiring additional sources of revenue suggesting that localization economies and local institutional support also play a role in the success of the organization

Chapter 1

Introduction and Purpose

“Creativity means business…Creativity has become the ultimate economic

resource, adding a new dimension to the competitive potential of cities around the

world.” (Meric Gertler, Canadian Architect, 7/25/2006) “Economic development and creativity are not separate entities…” (Canadian Architect, 7/25/2006)

1.1 Introduction and Motivation of Research

Both economic geography and marketing disciplines are concerned with the

locational dimensions of economic activities, including those associated with firms and

industries Industrial geography, for example is traditionally concerned with firm

location embeddedness and inter-organizational relationships (Yeung, 1998) Similarly,

the marketing discipline has focused on optimal location primarily as a function of

product distribution to the end consumer This may be seen for example in the real estate

industry where location plays a critical role in the positioning of retail outlets to best

serve target markets (Armstrong and Kotler, 2005)

Recently, the arts industry has become an interest in both disciplines From the

economic geography perspective, it is being examined for its potential contribution to

regional economic development (Beyers, 2002; Scott, 1997; Scott 1999; and Markusen

and King, 2003) William Beyers (2002) proposes that more economic geographic

research is needed as cultural industries become increasingly important to local

economies He suggests a greater attention to cultural industry income leakages from

local economies and the injection of “new” money from outside the community Other

economic geography studies of cultural industries focus on their effect on regional

employment (Scott, 1997), regional knowledge spill-overs forming agglomerations of

creative talents (Scott 1999), and the economic impact of the “artistic dividend”

(Markusen and King, 2003)

In 2000, the Americans for the Arts (2002) updated its first economic impact

study which was performed in 1994 It is estimated that in 2000 the US nonprofit arts

industry generated $134 billion in economic activity $53.2 billion in spending by arts

organizations and an additional $80.8 billion in event-related spending by arts audiences

This spending supports 4.9 million full-time jobs and generates $24.4 billion in federal,

state, and local government revenues annually By comparison, federal, state, and local

governments collectively spend less than $3 billion on support for the arts each year

The US Conference of Mayors (Americans for the Arts, 2002) urges cities across the

country to invest in nonprofit arts organizations through their local arts agencies as a

catalyst to generate economic impact, stimulate business development, spur urban

renewal, attract tourists and area residents to community activities, and to improve the

overall quality of life

Marketing is also playing an important role in the arts industry as a result of

financial cutbacks from traditional revenue sources such as government agencies,

corporate donors, and foundations These cut-backs have forced the arts industry to

examine its marketing practices in order to survive According to Hardy (1981), UK

theaters have been slow to adopt professional marketing practices In the US in 1987,

while ticket sales to nonprofit arts organizations exceeded ticket sales to sporting events,

the performing arts industry was experiencing declining financial support from

foundations, government agencies and corporate sources (Scheff and Kotler, 1996)

Corporations that continued to contribute did so out of commercial and not philanthropic

reasons Compounding this shift in corporate motivation to support the arts is the belief

that most patrons of the arts are unable to recall the sponsor of an event (LePla, 2004)

Seventy-five percent of the respondents in a study conducted by LePla (2004) indicated

that their purchasing behavior is not swayed by corporate sponsorship of the arts, with

people in higher income brackets being less likely to be influenced than those in lower

income brackets This is not good news for sponsors of arts events as the majority of arts

patrons are members of the high income bracket (DiMaggio, Useem and Brown, 1978;

Garbarino and Johnson, 1999; Americans for the Arts, 2002) These events have led to

increased studies in the marketing of the arts in the areas of audience development

(Samuels and Tonsic, 1996; and Rentschler, Radbourne, Carr, and Rickard 2002)

including target marketing to increase the diversity of patron demographics both

ethnically and by age (Zoll, 1997; Galvin, 1998; Stooksbury-Guier, 2001; and Dezell,

2002), and relationship marketing and audience retention (Rentschler, Radbourne, Carr,

and Rickard, 2002; and Garbarino and Johnson, 1999)

The Performing Arts Research Coalition conducted research to provide a detailed

picture of the value of the performing arts to individuals and their communities, and to

obtain a greater understanding of the perceived obstacles to greater attendance

(Kopczynski and Hager, 2002) The findings revealed that the arts audience was

comparable in size to audiences for movies and sporting events, and more diverse in

demographic characteristics than initially believed Such information should be useful to

a variety of stakeholders, including policymakers evaluating the role of government in

supporting the arts; funders who need hard data on which to base their financial support

of the arts; and managers of arts organization attempting to increase and diversify their

audiences

1.2 Purpose of Dissertation

Academic research on the marketing and organizational dimensions of the arts reflects the industry’s shift in focus from product development to audience development

in their marketing practices While product development and promotional strategies are important marketing variables, organization location selection is also an important

strategic factor for the arts industry organizations in terms of access to market demand conditions and necessary resources However, little research has been done on the

locational dimensions of arts organizations The purpose of this dissertation is to

compare the marketing activities of non-profit performance arts organizations (henceforth abbreviated to PAOs) to understand locational motivations of the industry and to

determine the relative importance of location in the marketing strategy More

specifically the research seeks to investigate the following themes: (i) the attributes that explain the location of theaters in second tier metropolitan areas, namely, Buffalo,

Cincinnati, Cleveland, Columbus, Milwaukee, and Pittsburgh, and (ii) the extent to which location influences the success of the organization Market demand, along with

congestion effects in traditional arts reputed cities such New York and Los Angeles result

in theater clustering in second tier cities (Sweeney and Feser, 1998; Markusen and King, 2003) Second tier cities in this study are defined as cities with a population range of 1 million to 2.5 million Specifically, the study will focus on the above six second tier cities

in the rust belt region of the Northeastern and Midwestern US This region stretches from the western end of Southern Wisconsin and St Louis, Missouri, to the East Coast, and as far south as the Baltimore, Maryland -Washington D.C area

To understand why second tier cities are becoming important hosts of the arts industry, the employment distribution of various industries is presented in Table 1.1 The table traces the change in manufacturing and service employment in first and second tier cities in the Northeastern and Midwestern United States from 1990 to 2000 Table 1.1

reports the change in employment of US manufacturing industry from 1990 to 2000 among cities in the Northeast and Northern Midwest of the United States (US) It reveals negative percentage changes in persons employed in the manufacturing industry in all of the six selected cities, while Cincinnati, Cleveland, Columbus, Milwaukee, and

Pittsburgh experienced positive percentage changes in total employment Table 1.2 further reports the change in employment in terms of occupations from 1999 to 2003 based on US Department of Labor statistics All six selected SMAs experienced positive percentage changes in the Arts, design, entertainment, sports, and media occupations

Both Tables 1.1 and 1.2 suggest that the arts industry is becoming more and more important as a source of employment in the six cities Markusen and King (2003) suggest that more research in regional economic development should be focused on occupations rather than industries, which would result in placing human capital at the center of the economic development process To identify cities with a high concentration of arts and

culture, this study utilizes Sperling’s and Sander’s work on Cities ranked and rated: More than 400 metropolitan areas evaluated in the U.S and Canada (2004) Sperling

and Sander (2004) divided arts and culture into three areas: Media & libraries,

performing arts, and museums This study will focus on the performance arts sector of cultural industries Sperling and Sander (2004) define performing arts as: i) classical music which includes traditional symphony and opera companies, ii) ballet/dance

companies, iii) professional theater companies, but not dinner theater or traveling shows, and iv) university arts programs that include classical music, dance, theater, and

international programs The rust belt US cities included for investigation in the proposed research are ranked within the top 30 cities on arts and cultural attributes

Table 1.1 Industrial Employment Statistics among cities in Northeastern and Midwestern United States

SMAs Total employment of persons 16

years and over

Persons 16 and over employed in Manufacturing Industry

Percentage of labor force employed in Manufacturing Industry

Persons 16 and over employed in Service Industry

Percentage of labor force employed in Service Industry

1990 2000 % change 1990 2000 % change 1990 2000 % change 1990 2000 %

change

change New York

8,716,770

9,520,481 9.22%

1,249,091 918,238 -26.49% 14.3 9.6 -32.87% 4,494,772 6,174,605 37.37% 51.6 65.0 25.97% Chicago

3,896,930

4,287,747 10.03%

775,237 681,863 -12.04% 19.9 15.9 -20.10% 1,722,461 2,442,498 41.80% 44.2 56.9 28.73%

Philadelphia

2,830,741

2,865,306 1.22% 483,768 339,580 -29.81% 17.1 11.9 -30.41% 1,368,653 1,769,144 29.26% 48.3 61.8 27.95%

2,538,924 19.49% 517,267 579,553 12.04% 24.3 22.8 -6.17% 903,675 1,321,385 46.22% 42.5 52.1 22.59%

Boston

2,173,765

2,952,632 35.83% 379,206 397,441 4.81% 17.4 13.5 -22.41% 1,091,959 1,829,602 67.55% 50.2 62.0 23.51%

Minneapolis

1,329,371

1,619,473 21.82% 260,067 257,567 -0.96% 19.6 15.9 -18.88% 599,656 920,866 53.57% 45.1 56.8 25.94%

St Louis

1,154,922

1,252,570 8.45%

219,038 178,594 -18.46% 19.0 14.3 -24.74% 506,579 723,640 42.85% 43.9 57.8 31.66%

Baltimore

1,192,182

Pittsburgh

972,290

1,074,663

10.53% 141,719 132,180 -6.73% 14.6 12.3 -15.75% 447,748 623,861 39.33% 46.1 58.1 26.03% Cleveland

1,266,993

1,401,208

10.59% 292,728 272,444 -6.93% 23.1 19.4 -16.02% 535,200 762,768 42.52% 42.2 54.5 29.15% Cincinnati 828,333 968,170

16.88% 170,085 167,913 -1.28% 20.5 17.3 -15.61% 345,025 525,857 52.41% 41.7 54.4 30.46% Columbus 690,205 792,093

14.76% 101,539 87,896 -13.44% 14.7 11.1 -24.49% 335,280 476,985 42.26% 48.6 60.2 23.87% Providence 558,603 569,397

1.93% 136,255 100,960 -25.90% 24.4 17.7 -27.46% 236,377 321,438 35.99% 42.3 56.5 33.57% Indianapolis 633,277 810,610

28.00% 111,736 127,965 14.52% 17.6 15.8 -10.23% 279,644 440,056 57.36% 44.2 54.2 22.62% Milwaukee 784,796 832,079

6.02% 195,975 177,910 -9.22% 25.0 21.4 -14.40% 328,268 448,013 36.48% 41.8 53.8 28.71% Buffalo 542,686 531,984

-1.97% 101,947 83,296 -18.29% 18.8 15.7 -16.49% 248,126 308,457 24.31% 45.7 58.1 27.13% Hartford 572,120 583,072

1.91% 109,478 83,940 -23.33% 19.1 14.4 -24.61% 286,414 358,581 25.20% 50.1 61.4 22.55% Rochester 491,589 526,930

7.19% 132,954 111,271 -16.31% 27.0 21.1 -21.85% 206,294 289,673 40.42% 42.0 55.0 30.95%

Source: US Census 1990 – 2000

Note: Not all industries are reported here; *2000 Washington D.C SMA includes data from Baltimore as a result of 1997 census re-definitions

Table 1.2 Occupational Employment Statistics among cities in Northeastern and North Midwestern United States

MSA’s Service related occupations Goods related Occupations

Health care & social services All Occupations Business &

finance

Practitioners &

technical

Healthcare support

Community &

social services

Sales & related Arts, Design,

entertainment, sports, and media occupations

Production Transportation

& material moving

1999 2003 1999 2003 1999 2003 1999 2003 1999 2003 1999 2003 1999 2003 1999 2003 1999 2003

New York

3,485,035

3,976,070 191,940

194,230 203,030

207,880 147,190

137,410 54,620

77,420 364,580

395,170 120,620

112,790 239,460

151,110 198,290

193,300 Chicago

3,707,600

3,973,440 209,330

191,740 186,170

183,140 63,310

78,170 49,690

41,470 395,320

405,710 46,900

50,270 439,980

334,710 322,920

330,470 Philadelphia

2,229,945

2,318,870 94,770 103,410 135,650 138,040 58,990 61,980 31,070 42,440 244,910 254,190 22,560 23,560 193,040 138,750 155,820 153,110

DC

2,431,875

2,694,130 161,890

185,220 110,780

108,130 38,340

40,880 24,290

26,980 240,140

244,640 45,290

50,690 80,310

70,570 132,360

123,990 Detroit

1,879,275

2,015,850 96,850

105,520 97,240

95,960 53,110

50,590 20,760

16,210 209,810

213,370 25,310

26,160 296,540

225,010 154,200

143,180 Boston

1,885,050

1,920,950 93,430

93,680 115,270

112,510 51,170

46,240 28,060

30,310 199,800

189,820 27,370

29,200 127,750

95,050 98,020

90,060 Minneapolis

16,111,220

1,686,210 90,060

104,750 81,360

76,840 41,430

35,960 23,970

25,190 186,730

193,760 27,920

23,830 173,710

135,230 124,970

99,160

St Louis

1,237,635

1,274,720 42,720

52,780 65,890

67,920 32,020

34,500 14,350

12,030 138,870

134,020 14,440

15,790 118,130

98,970 102,470

89,530 Baltimore

1,047,310

1,223,090 52,200

54,920 73,250

64,290 25,530

27,610 21,500

24,360 118,350

120,840 14,100

14,160 70,370

55,460 80,340

75,670 Pittsburgh

992,070 1,070,840 34,080 36,590 60,530 65,740 33,440 32,020 14,110 17,080 112,740 110,580 9,390 10,390 84,330 75,130 99,170 72,900 Cleveland

1,047,980

1,083,810 41,920

52,560 64,440

60,890 28,270

32,490 11,290

14,100 123,910

116,940 10,510

12,550 150,440

109,880 84,650

77,790 Cincinnati

829,420 845,240 26,390

38,330 46,910

43,490 24,690

22,190 8,990

8,630 89,230

91,610 8,880

9,210 88,810

69,030 73,950

68,540 Columbus

768,410 845,420 30,010

43,220 41,160

43,420 19,400

20,190 9,710

9,140 77,360

84,050 8,150

11,490 71,410

58,060 73,830

71,960 Providence

466,800 520,890 16,560

18,410 31,290

32,060 14,450

17,620 10,310

11,050 53,700

52,670 4,670

5,860 62,230

55,080 36,450

30,760 Indianapolis

818,020 854,710 39,270

37,320 48,080

45,070 14,870

17,910 8,210

7,060 100,500

89,480 11,420

9,920 100,800

73,900 75,780

74,400 Milwaukee

878,085 817,420 31,840

32,600 42,650

41,560 23,760

23,970 8,230

11,310 85,510

81,780 10,220

12,510 139,860

97,970 64,970

57,460 Buffalo

526,370 527,240 16,700 18,090 33,270 28,360 15,950 15,680 10,410 7,860 55,910 54,370 4,640 4,750 58,270 49,620 35,130 32,170 Hartford

567770 597,390 32,300

37,340 25,900

31,720 16,600

17,530 9,090

11,520 60,800

55,310 7,070

7,610 58,170

43,400 37,870

32,420 Rochester

Incidence of failure in the sense of mortality rates of nonprofit arts organizations was found to be higher than other forms of nonprofit organizations in a study by Bowen, Nygren, Turner, and Duffy (1994) The authors examined the nonprofit organization failure rates from 1984 to 1992 and found that on the average nonprofit organizations failed at a rate of 2.2 percent annually In contrast, they observed that arts organizations had a substantially higher annual failure rate with the performing arts of ballet at 25.1 percent, opera at 22.7 percent, dance at 22.3 percent, and theater at 20.3 percent The only type of nonprofit organization with a higher failure rate than those mentioned above

is job training organizations with a failure rate of 26.5 percent (Bowen, Nygren, Turner, and Duffy, 1994) Given this observed high failure rate of ballet, opera, dance and

theater, this dissertation will attempt to determine the variables contributing to the

success of independently operated nonprofit ballet, opera, dance, and theater companies

1.3 Overview of Dissertation

The research will be undertaken using multiple methods that employ a

combination of mail and telephone interview surveys of non-profit performance arts

organizations in six cities located in the traditional manufacturing belt of the US Chapter

2 provides the theoretical basis for the research by reviewing two strands of the regional

development literature The first section of Chapter 2 reviews classical location theory

which focuses on a firm’s location decision based on access to transportation In addition

this section examines staple and export based theories and their implications for regional

economic growth The second section of Chapter 2 provides the theoretical framework

from the perspectives of firm-centered and human capital-centered theories and their

movement from the manufacturing sector and application to the service sector

Chapter 3 provides an overview of the marketing process, and the marketing and

locational motivations of non-profit organizations The first and second sections of

Chapter three focus on the generalities of marketing and nonprofit marketing The third

section of presents the background of nonprofit performance arts organizations (PAOs)

The fourth and final section of Chapter 3 reviews the literature on the locational

preferences of nonprofit organizations

Chapters 4 and 5 present the methodology as well as the results of the mail and

telephone interview surveys Chapter 4 describes the sample selection and the data

collection methods Chapter 5 describes the characteristics of the sample data, analyses

the quantitative data obtained from the mail survey and the qualitative data obtained from

the interview survey, and provides a profile of the characteristics and perceptions of the

performance arts organizations that are located in the six cities selected for this study

Chapter 6 summarizes the results of the research questions, discusses policy

implications of the study’s results, as well as the shortcomings of the research, and

suggests possible directions for future research

Chapter 2

Theoretical Background

In this chapter, both classical and more recent strands of regional development

theories will be reviewed Classical theories on regional development are far more

relevant to industrial economies where agricultural and manufacturing activities

dominate In contemporary regional economies and cities where producer services form

an important share of economic output (Sassen, 2001), it is the creative industries that

have gained considerable attention among geographers recently The nature of creative

industries suggests that agglomeration economies and their emphasis on creative human

capital linkages are more relevant to the research themes in this dissertation

2.1 Traditional Regional Development Theories

Regional development theories harkens back to the 1930s when the optimum

location of manufacturing industries became a popular theme

From the perspective of classical location theory, access to transportation is one

of the key variables determining a firm’s locational choice (Sassen, 2001) The early

location theories of Weber (1909) and Losch (1940) focused on the movement of goods

and the availability of labor and markets Alfred Weber was a German economist and

pioneer in industrial location theory Weber (1909) formulated a theory of industrial

location in which an industry is located where the transportation costs of raw materials

and final product is a minimum The point for locating an industry that minimizes costs

of transportation and labor requires analysis of three factors: i) the weight of the raw

materials or final products, ii) availability and cost of unskilled or skilled labor, and iii)

the concentration of firms allowing individual firms to enjoy external and internal

economies of scale

In addition to the Weberian model, other more traditional theories focus on the

role of resources and exports in local development, that is, export-led growth theories,

such as the staple theory and export base theory Thomas (1964) defines economic

growth as “a rise in output per head of population” Economic growth is a function of

availability, cost, and allocation of natural resources and human behavior and occurs

when increases in efficiency of the use of inputs result in an increase in supply of outputs

Thomas (1964) suggests that the human behavior factors that inhibit or promote

economic growth may include society’s system of values, religion, institutions, changes

in the society’s demographic characteristics, and the society’s ability to create and adapt

to technological change Economic growth may occur as a result in increased internal

market demand for a region’s output if it results in an increase in real income, and an

increase in external market demand for regional output

Staple theory assumes that staple export production is the leading sector of a

regional economy and therefore is the catalyst of economic growth (Watkins, 1963;

Altman, 2003; North, 1955; and Hayter and Barnes, 1990) North (1955) was one of the

first researchers to apply location theory in his analysis of the historical economic growth

of American regions North (1955) suggests that regional growth occurs in five stages

Stage one is characterized by a self-sufficient subsistence economy In stage two, some

local specialization and trade will take place as improvements in transportation occur

Stage three is marked by a progression of agricultural crops while early industrialization

underscores stage four The final stage five will see a specialization and exportation of

staples from the region to less developed regions North’s (1955) Location Theory and

Regional Economic Growth is concerned with the fourth stage, early industrialization, in

which staple products are produced and exported Staple products are predominantly raw

materials (Altman, 2003) and may be defined as the leading export product(s) in a given

sector (Watkins, 1963) The basic objective of the staple theory of economic growth is

to produce goods by using a region’s natural resources, resulting in an increase of income

to the region As staple production continues, staple producers become more efficient in

producing the staple; this process leads to more investment and hence the subsequent

growth of the staple industry (Altman, 2003) Federal and state aid, in the form of

transportation improvements, increases the competitive position of the region (North,

1955; Hayter and Barnes, 1990) The growth of the staple industry generates linked

industries that are dependent on the staple production, residentiary industries then

develop to meet the consumption needs of the staple producing population, and footloose

industries that develop by chance may become additional staple industries (North, 1955)

North suggests that while the staple industry may not be the most dominant producer in

terms of employment and output in an area, its existence creates staple-related linkages

that generate a higher level of income than would be produced in its absence

The export base theory emphasizes the value of export industries in explaining

regional economic growth (Thomas, 1964) Regional economic growth is determined by

the success of the export sector and the characteristics of the export sector Economic

growth will exist when export activities create an economic base from which other

industries or residentiary economic activities are derived This diversification of

industrial structure creates new levels of economic activity Hence, the export sector

growth is the means by which resulting dependent residentiary industries develop and

grow North (1955) suggests that regional economic growth is a function of the growth

rate of the export sector, and its export sector growth facilitates the growth of the

supporting, non-export residentiary sectors The arguments for a positive export–

economic growth relationship include: first, an increase in demand for a country’s

products increases the production of such products Second, as production increases in

certain products, specialization in production of such products improves the productivity

along with improving the skill level of producers The increase in both demand and

productivity may lead to a reallocation of domestic resources from less efficient sectors

to more efficient sectors If domestic markets are too small to achieve economies of

scale, adding an export market may help a region to achieve scale economies

More recent studies of export promotion and growth studies include Ambler,

Cardia, and Farazili (1998) and Poon’s (1994) studies of quantitative links between

export promotion policies and economic growth Poon (1994) examined 61 developing

countries, their export promotion strategies, and economic growth She concluded that

the relationship between exports and economic growth is overall positive, resulting in the

occurrence of above-average growth rates, when competitive developing countries

experience a high demand for their exports Ambler, Cardia, and Farazili (1998) cite

South Korea, Hong Kong, Singapore and Taiwan as examples of positive economic

growth resulting from government implementations of export promotion strategies and

policies During the 1980s, South Korea experienced an average ratio of exports to GDP

of 40 percent while similar ratios of Hong Kong, Singapore and Taiwan were above 100

percent The World Bank (1993) suggests that the above countries are “models” for

development Their experiences have been expanded to China and the country’s

relatively recent openness to trade has been viewed as its catalyst to continued robust

economic growth and an improved allocation of domestic resources (Findlay and Watson,

1996)

The research of Ambler, Cardia, and Farazili (1998) involved constructing a

model to demonstrate the quantitative link between export promotion commercial

policies and economic growth The authors suggest that export promotion policies

contribute to a reallocation of financial and human capital which ultimately creates a

learning-by-doing externality, otherwise known as a human capital accumulation

externality (Lucas, 1993), generating a positive effect on economic growth

More recent works by geographers suggest that export growth supports increased

production and higher productivity, while higher productivity results in increased

production and export growth (Leichenko, 2000)

The export base sector may be sufficient for regional economic growth on the

condition that the region can produce at a lower cost while obtaining a greater return on

input factors than competing regions (Tiebout, 1956) In 1956, Tiebout was one of the

first to contribute to the debate regarding the relationship between exports and economic

growth He asked the following question: “Is export growth the ‘engine’ of economic

growth?” According to Tiebout (1956), it is presumptuous to assume that the export

sector is the most significant variable in determining regional income and he suggests

that the export base theory primarily applies to small regional economies that are

dominated by few sectors His criticism of the export base theory focuses on the

problems of measuring the size of the export sector and the ratio between the export

activities and residentiary activities He argues that in large highly diversified regions,

where export sectors account for a small percentage of regional output, the residentiary

sectors may be the generators of economic growth Tiebout (1956) suggests an existing

optimal ratio of input factors between the export activities and residentiary activities, and

that an over-investment in the export base sector may indicate a misallocation of

resources

Jaffee (1985) has raised some concerns regarding export dependence and the

resulting long term negative consequences Jaffee (1985) proposed that the positive

effects on export promotion on economic growth may be either reduced or reversed under

conditions of export price fluctuation, raw material specialization, commodity

concentration, and foreign capital penetration He defined export dependence as a

condition when a large portion of a country’s GDP is created by exports He suggested

that when a country’s economy is largely dependent on external demand, a condition over

which they have little control, this places the country in a vulnerable position, especially

in the long term He further suggested that export dependence may create a situation

where political and economic policies may over-divert resources to the export industry

therefore creating under-diversified investment in other industries Finally over-reliance

on investment from MNCs may create an environment where the export sector is

controlled by foreign nationals and profits are often repatriated back to the home country

negating any possibility for reinvestment in new forms of production and economic

activity Jaffe (1985) finds that country’s with heavy foreign capital penetration gain less

in economic growth that country’s with less foreign capital investment Jaffe’s (1985)

research results demonstrate that an economic strategy with an over reliance on the

export of raw materials and the import of finished goods will result in the retardation of

economic growth Jaffe (1985) concludes that over dependence on the export of primary

products for manufactured goods and the presence of extensive foreign capital, may

create long-term structural distortions resulting in negative economic growth or at least

significantly reduce economic growth

The Weberian, Staple and Export base theories, however, are more suitable for

explaining a traditional economic base that is largely associated with the manufacturing

and agricultural commodity (e.g minerals) sectors More recently regional development

theories have moved away from such locational analysis to firm-centered and human

capital-centered theories that may be more relevant for understanding cultural industries

like the performance arts industry These are elaborated below

2.2 More Recent Development Theories

2.2.1 Agglomeration economies and clusters

Agglomeration is a phenomenon of spatial clustering or concentration of firms in

a region or area Much of the literature on agglomeration economies have focused on the

manufacturing sector Economic agglomeration and industrial clustering was the focal

point of Marshall’s (1890) study of industrial districts Marshall (1890) suggests that

firms cluster within geographic regions to reap benefits of backward and forward

linkages, dense markets for specialized skills, and knowledge spillovers Marshall was

concerned with access to raw materials and the production of intermediary materials,

known as backward and forward linkages Backward linkages consist of production in

one industry supplying production in another industry; for example the paper industry has

backward linkages to the forestry industry Forward linkages consist of intermediary

material to be used further down the production chain For example, the plastic

producing industry creates materials to be used in production requiring plastic Marshall

(1909) also draws on previous observations of access to skilled labor, particularly the

notion of knowledge spillovers Knowledge spillovers occur when external knowledge

is transferred using face-to-face contacts or through inter-firm exchanges, co-location and

networks; it is often facilitated by spatial proximity

Along with Marshall, Michael Porter (1990) has also contributed to the body of

research on industrial clustering with his theory of competitive advantage which focuses

on four forces (plus two): competitive forces, demand forces, supporting industries, and

available resources, as well as chance and government Porter suggests that clustering

provides much competitive advantage as these advantages may reside outside the firm

and even outside the industry itself, but in the location of the firm An objective of this

dissertation is to find unique locational attributes that foster the growth and viability of

the performance arts industry

In the 1970s, Fordist style production was replaced by flexible specialization, or

post-Fordist production leading to geographic studies of new industrial spaces (Barnes

and Sheppard, 2000) This transformation not only changed the way goods were

produced, but also transformed the geography of production Flexible specialization

required greater physical interaction and closer proximity between firms than Fordist

production Flexible specialization called for subcontractors and research and

development operations to be located closer to the production plant in order to consult

with production staff At the same time, production workers no longer worked in

monotonous assembly lines, but collaborated in work teams

Scott (1988) cites examples of the “new industrial space” which are organized

around flexible specialization in California He proposes that traditionally, large firms

benefit from internal economies of scale whereas small firms in these new industrial

spaces benefit from external economies of scale This framework suggests that arts

organizations, like small firms, would gain competitive advantage from agglomeration

economies

However, early theories on agglomeration and clustering focused on the

manufacturing industry By 1985, service industries accounted for 70% of US domestic

product (Sassen, 2001) Studies on consumer service tend to suggest a strong

correspondence between population distribution and consumer services (Gordon and

McCann, 2000) Evidence supports the hypotheses that consumer services are more

evenly distributed than producer services which are found to be highly concentrated in

central locations (Gordon and McCann, 2000) However, the evidence also shows that

some of the less central regions are growing faster in terms of population and are

showing higher growth rates in producer services, even though in relative terms they have

under-representation of such services and increasing representation of consumer services

(Gordon and McCann, 2000)

Another type of externalities in agglomeration or cluster economies consists of

the amenities and lifestyles that large urban centers can offer the high-income personnel

employed in the product services (Sassen, 2001) Cultural activities are among the most

desired amenities and lifestyle choices It is the intent of this study to determine if

performance arts organizations benefit from agglomeration economies, more specifically,

the presence of similar and supporting industries (localization economies), or from the

co-location with other sectors (urbanization economies) These are elaborated further

below

2.2.2 Localization and Urbanization Economies

Economic activities have a very strong propensity to cluster or agglomerate in

specific locations Once agglomerations are formed, they have a strong propensity to

develop path-dependent (historical trajectory) future geographies (Krugman, 2000)

According to Dicken (2003), generalized clusters simply reflect the fact that human

activities tend to agglomerate to form urban areas Resulting benefits have been called

urbanization economies General clustering of activities creates the basis for sharing the

costs of a range of services Urban areas facilitate the establishment of an assortment

infrastructural, economic, social and cultural facilities not available in areas more

sparsely populated As the population of an urban area increases, so does the likelihood

of urbanization economies Dicken (2003) states that specialized clusters demonstrate the

propensity for firms of closely related industries to locate in the same place to form

‘industrial districts’ These industrial districts benefit from localization economies

Dicken (2003) goes on to suggest that clusters generate two types of

interdependency: 1) traded interdependency where transportation and/or direct

transaction costs are lessened by spatial proximity, and 2) untraded interdependency

where access to a specific labor pool, institutions and socio-cultural interactions result in

knowledge spillovers and positive externalities Informal relationships from past

experiences that facilitate knowledge spillovers require geographic proximity (Jaffe,

Henderson, and Trajtenberg, 1993)

Despite a reduction in transportation costs and an increase in instantaneous

communication technologies, the geographic density of employment in many sectors has

continued to increase in the US and developing countries (Kim, 2002; Scott, 2001)

Viladecans-Marsal’s (2004) study examines the spatial concentration of production and

employment patterns in Spain Her research on various manufacturing sectors attempts

to determine whether localization economies (geographic specialization in specific

activities) or urbanization economies (a geographic area with a diverse economic

environment) have an impact on specific sectors studied The manufacturing sectors she

studied were categorized into high-technology activity (office and computing machinery),

medium level of technology (chemical products and motor vehicles), and traditional

manufacturing activities (food, textiles, and leather and footwear) Although evidence

exists that localization economies are more important for traditional manufacturing

activities whereas urbanization economies affect high-tech activities (Moomaw, 1988),

Viladecans-Marsal found that all sectors in her study with the exception of motor

vehicles and leather and footwear benefited from urbanization economies

Viladecans-Marsal’s results indicate that agglomeration economies play a role in the location

decision of the studied manufacturing sectors while urbanization economies play a

significant role in the location decision of the office and computing machinery sector

while localization economies play a significant role in the location decision of the leather

and footwear and textiles sectors

An urban area presents several location advantages for a firm including lower

transport costs of end goods to the market, availability of intermediate products, and a

pool of labor with diverse skills (Glaeser, 1998) These advantages increase as the

population increases, until a point of diseconomies, or congestion costs that may be

characterized by pollution or high rent costs (Glaeser, 1998)

In Sassen’s (2001) Global Cities, the author focused on the world’s largest cities

and their propensity to produce agglomerations of producer services as economies shift

from manufacturing to service economies Producer services are intermediary services

that can be internalized by firms or they can be bought on the market, and include

financial, legal, computer and data processing, distribution, management and consulting

services The telecommunications industry has played an important role in the tradability

of producer services Specialization and urbanization economies have contributed to

making cities favored locations, especially for the most strategic and complex of these

services, that is, financial services Poon (2003) examined the emergence of world cities

as financial and stock market capital centers, specifically the spatial distribution of

financial services among the cities She argued that the presence of a sophisticated stock

market is necessary for a city to attain “world city’ status Poon (2003) suggests that

advantages of scale economies facilitate the concentration of financial and investment

institutions These scale economies are the result of the reduction of transaction costs as

information flows improve with continuous interactions In addition to scale economies,

“world cities” need to be located in regions of stable financial and currency systems that

are also abundant in skilled human capital such as lawyers and accountants

According to Moomaw (1988) and Nakamura (1985), urbanization economies are

more important to light industries than heavy industries Combined with the observation

by Ki (2001) who has suggested that urbanization economies play a more dominant role

in innovations, their propositions indicate that performance arts organizations would

benefit more from urbanization than localization economies

Scott (1999) studies the uniqueness of the recorded music industry and how the

instabilities of the industry foster clustering to create a form of social insurance for

procurement of necessary services on a timely basis These instabilities result from

fluctuations in product demand I expect to find important social interactions in the form

of inter-industry interactions as organizations engage in collaborations, and external to

the industry but internal to the location as a source of revenue, producer services, and

labor It is possible that organizations perceive investment in the social networks as too

important to relocate to a more prosperous location

According to Storper and Venables (2004) the opportunity for face-to-face contact

plays a significant role in forces of urbanization and localization economies They

believe that complex communication which involves face-to-face contact facilitates

efficient communication, while it helps solve incentive problems Face-to-face contact

provides psychological motivation and opportunities for socialization and learning The

authors suggest that face-to-face contact is most important in creative industries,

specifically where information is imperfect, rapidly changing and not easily codified

Storper and Venables (2004) observe that the three main forces contributing to

urbanization and localization economies are backward and forward linkages of firms,

including access to markets, clustering of potential employees, and propensity for social

interactions which promote technological innovation While past authors claim that

urbanization and localization economies exist as a result of high physical transportation

costs (Dicken, 2003), Storper and Venables (2004) claim that face-to-face contact is

essential to reduce transaction costs “Face-to-face” is an efficient communication when

content cannot be codified It allows for depth in content and instant feedback that is not

possible in sequential un-interrupted interaction “Face-to-face” communication transmits

all verbal, physical, contextual, intentional, and un-intentional communication

“Face-to-face” communication also reduces the free-rider problems as it is easier

to observe and interpret a partner’s non-verbal messages “Face-to-face” contact helps in

judging emotions, potential cooperation and trustworthiness

While “face-to-face” contact is time consuming and therefore relatively costly in

terms of economic value of time, it is an efficient manner from which to screen and

identify a person with whom we want to interact Informal networks create a setting

where knowledge regarding a member’s competence can be shared According to

Storper and Venables (2004) geographical proximity is essential for the development of

such informal networks Tacit knowledge that is transmitted is especially important in

fields such as fashion, public relations and the arts Socializing within these informal

networks enables members to identify other members who are at the “top” of their field

and therefore deserve to remain in the “loop” This supports more efficient partnering,

increases cooperation, and reduces the free rider problem

In some fields, official certification or professional exams convey the competence

of professionals However in the area of the arts and other creative activities,

professional ability may only be assessed by observation Within these social networks,

members lose anonymity, which increases the efficiency of the screening mechanism that

“face-to-face” contact provides All members have the ability to observe and judge other

members knowing they are also being observed and judged As a result, members in “the

group” generally possess higher than average ability, and are highly motivated to stay

within the group (Storper and Venables, 2004) This benefit of belonging to this social

network can only be achieved through co-location frequent occasions of “face-to-face”

contact

In diversified city economies, agglomerations of different sectors share

information and clients create agglomeration efficiencies from this inter-network (Stroper

and Venables, 2004) Creative and cultural sectors especially benefit from these

interactive information sharing activities

2.2.3 Creative economies and human capital theory

More recent literature has considered the relationship between the agglomeration

of human capital and its effect on regional productivity (Lucas, 1988; Beyers, 2002;

Scott, 1997; Scott, 1999; Markusen and King, 2003) According to Lucas (1988) human

capital spillover in cities is significant in creation of new ideas which support economic

growth As regional economies in the US become less reliant on the production of goods

and more dependent on the service industries, “there has been a great interest in using

cultural industries as vehicles of regional economic development” (Beyers, 2002 p.18)

Allen Scott (1997) suggests that as disposable consumer income increases, this will result

in the increase of consumption of cultural products of all kinds Scott (1997) defines

cultural products broadly ranging from clothing, furniture, published products, leather

goods, and jewelry to radio, television, and film Scott’s study focuses on cultural

industries and their effect on regional employment While Scott’s definition of cultural

industry is broadly defined, many of his observations may be applied to cultural activities

within the arts community that is: 1) culture tends to have place-specific characteristics;

2) the agglomeration of cultural industries gives rise to value adding externalities and

innovative energy; and 3) agglomeration facilitates the emergence of necessary

institutional infrastructures

Using US census data, Markusen and King (2003) observe a slower economic

growth rate in traditional cultural centers such as Los Angeles and New York City and

relatively faster economic growth rates in some of the second tier cities This

phenomenon may be a result of the fact that of localization economies are often offset by

urbanization diseconomies as a result of congestion effects (Henderson, 1986)

Markusen and King (2003) suggest that artists make larger contributions to a regional

economy than is presently believed There is, therefore, reason to believe that the artistic

dividend helps to stabilize and revitalize neighborhoods, and that the economic impact of

the artistic dividend extends beyond the multiplier effect Markusen and King (2003)

believe that the artistic dividend compares favorably with economists’ analysis of a