25-02-2020

Theories of Spatial Concentration

(Agglomeration) of Economic Activity
(A very basic introduction)

Course 006 (EDPI)

February 2020

Agglomeration / Centripetal forces

(Mainly relevant for manufacturing and related services)

Basic idea: external economies of scale, with entry or expansion

of firms creating various positive externalities for other firms in
the same region  IRS at the level of the industry, even if we
have CRS (constant AC) for each firm. Different authors have
provided different mechanisms and models.

Marshallian ‘localization’ economies

• Labour market pooling (proximity to workers with relevant skills)
• Technological spillovers (proximity to ideas)
• Buyer/seller linkages (proximity to goods, esp. intermediate input
suppliers and buyers)

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Dispersion / Centrifugal forces

• Technological diffusion: more important in low density regions with few
agglomeration externalities.
• Agglomeration causes congestion and pollution  rising costs for firms
and disutility for workers
• Regionally immobile factors, esp land 
– rising rents as a result of agglomeration, inducing firms and workers to
move away;
– agricultural incomes earned by those remaining in the declining region
provides stable demand, discouraging further out-migration.
• Agglomeration  entry  more competition  decreasing profit
margins, discouraging more agglomeration (not used in these readings)

Balance of agglomeration and

dispersion forces
• Krugman-type NEG models: Equilibrium regional location occurs when
agglomeration and dispersion forces offset each other. It is possible for all
manufacturing activity to shift to one or a few locations, with complete
‘deindustrialization’ in the other regions
• Desmet et al model: Relationship between initial manufacturing density
and subsequent manufacturing growth follows a sideways S shape, with
higher growth (relative to medium density regions) in low density regions
due to diffusion, and in high density regions due to spillovers. Highest
density regions with ‘mature’ industries using older technology should
grow slowly or decline, due to congestion.
– This pattern is not seen in India, esp in services, perhaps due to poor
human K and infrastructure in medium-density districts. But note that
their data is for 1999-2005. Situation may be different now.