Where do different industries locate? What factors influence the spatial distribution of economic activity within countries? Finding answers to these questions is important for understanding the development potential of sub national regions. This is particularly important for developing countries as they have relatively lower levels of overall investment and economic activity is concentrated in one or a few growth centers.
Thus, regions that do not attract dynamic industries are not only characterized by low productivity, but also by lower relative incomes and standards of living. These questions on industry location and their implications are not new. Examining the locational aspects of economic activity has long been of interest to geographers, planners, and regional scientists (Weber, 1909; Losch, 1940; Hotelling, 1929; Greenhut and Greenhut, 1975, Isard 1956).
However, analytic difficulties in modeling increasing returns to scale marginalized the analysis of geographic aspects in mainstream economic analysis (Krugman 1991). Recent research on externalities, increasing returns to scale, and imperfect spatial competition (Dixit and Stiglitz 1977; Fujita, et al. 999; Krugman 1991) has led to renewed interest in analyzing the spatial organization of economic activity. This is especially true in case of geographic concentration or clustering.
Models in the New Economic Geography’ literature (see review in Fujita, Krugman, and Venables, 1999) allow us to move from the question Where will manufacturing concentrate (if it does)? ‘ to the question What manufacturing will concentrate where? ‘ These insightful theoretical models provide, for the most part, renewed analytical support for the “cumulative causation” arguments made in earlier ecades on the core-periphery relationship, on agglomeration economies, and on industrial clustering.
In this context, we are interested in finding empirical answers to these (very old) questions, and to go beyond, to ask, “What manufacturing will locate where and why”? Industry location and concentration decisions are driven by two fundamental considerations: a set of “pure” location or “economic geography” criteria, including well recognized elements such as urbanization and localization economies, market access, infrastructure availability, etc.
The other is a set of “practical” or “political economy” riteria, where the state is a key player in industrial ownership and production, and uses location considerations that are different from the private sector. The private sector responds to the very strong influence of state regulations, and the result is an industrial geography that is shaped by factors of economic geography and political economy. To understand the process of industrial location and concentration, it is important to first analyze the location decisions of firms in particular industries.
The location decision of the individual firm may be influenced by several factors. These include (a) history – being accidental’, (b) availability of infrastructure, proximity to buyers and suppliers, and local amenities – economic geography’, and (c) local wages, taxes, subsidies, and incentives – political economy’. In this paper, we undertake two exercises: First, we develop and estimate an economic model to assess the impacts of region specific characteristics on location choices of firms in carefully defined industries.
Second, we study the industrial clustering process within metropolitan areas. 4 For the empirical application in the first part, we use micro level establishment ata for Indian industry to examine the contribution of regional characteristics on location choices. Our concept of regional characteristics extends beyond its natural geography. Rather than focusing on inherent characteristics such as climate and physical distance to the coast and market areas, we analyze the economic geography of the region.
Economic geography characteristics include quality of the transport network linking the location to market centers, presence of a diverse supply of buyers and suppliers to facilitate inter industry transfers, and local amenities. Drawing on testable hypotheses from the New Economic Geography (NEG) literature, this analysis will provide the micro-foundation for understanding whether a region’s economic geography influences location decisions at the firm level.
Only by first explaining these decisions, it will be possible to build a general framework for evaluating the overall spatial distribution of economic activity and employment. In the second part we investigate the industrial location process within metropolitan space. Unlike in the first part, here we do not model intra-metropolitan industrial locationsnot enough is known about intra-metropolitan clustering in eveloping nations generally to begin hypothesis testing, nor are the kind of data available that would allow it.
Instead we take a different two-step investigative approach: First we examine the patterns of industrial clustering (which industries are clustered, in which cities) and identify local clusters of specific industry groups. Second, we attempt to explain the observed patterns of industry location from a number of economic and political economic perspectives. Using plant or “factory” level data for 1998-99, from the Indian Annual Survey of Industries (ASI), we examine location choices in eight three-digit manufacturing industries.