Working Paper: CEPR ID: DP909
Authors: Philippe J Martin; Carol Ann Rogers
Abstract: This paper examines the impact of public infrastructure on industrial location when increasing returns are present. Poor infrastructure implies costs of Samuelson's `iceberg' form and alter trade both within and between countries. Trade integration implies that firms tend to locate in countries with better infrastructure so that regional policies that affect the level of public infrastructure influence economic geography. The effectiveness of such policies decreases when infrastructure improves, however, because a high level of infrastructure and strong economies of scale magnify the concentration effects of differentials in infrastructure, market size and capital-labour ratios. Infrastructure policies that facilitate intra-regional trade in the poor country lead to regional convergence but policies that facilitate intra-regional trade lead to regional divergence. We also analyse the incentives for countries to inhibit industrial relocation.
Keywords: public infrastructure; industrial location; trade integration; regional policies
JEL Codes: F1; H4; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Poor infrastructure (H54) | Increased trade costs (F19) |
| Increased trade costs (F19) | Firm relocation decisions (R30) |
| Trade integration (F15) | Firms concentrate in regions with better infrastructure (R30) |
| Regional policies improving infrastructure (H54) | Regional convergence (F62) |
| Regional policies improving infrastructure (H54) | Regional divergence (F12) |
| Better infrastructure (H54) | Lower costs (D61) |
| Lower costs (D61) | Higher relative demand for products (R22) |
| Trade integration with differing infrastructure levels (F15) | Ambiguous effects on firm relocation (R30) |
| Improving infrastructure in a poor country (H54) | Industrial concentration in that country (L79) |
| Improving infrastructure (H54) | Diminishing effect on industrial concentration (L16) |
| Infrastructure policies favoring international trade (F10) | Divergence (F62) |