A review of Industrial Location and Public Infrastructure

Abstract

The paper reviews a study authored by Phillipe Martin and Carol Anne Rogers in the Journal of International Economics – “Industrial Location and Public Infrastructure” (1995). It has examined critically the effects of public infrastructural facilities on the locations industries are based when assured of constant and increasing returns. When there are high levels of international infrastructural development that promise high returns, there is increased relocation of industries because of the differences in local infrastructure and domestic capital resources.  Whereas regional policy in financing local infrastructure in poorer nations would result in domestic relocation, international infrastructure policy in developing countries would lead to businesses leaving those regions. The research also analyzes inducements that a country could use to curb relocation of its local firms.

Keywords: infrastructure, capital resources, policy development.

 

 

The Problem Addressed

The article examines the structure of infrastructural demands and the reasons of infrastructure being the key for attracting industrial growth. The authors have utilized a significant part of their study on European countries as they argue that countries in the region are investing heavily in new and important infrastructure including railway networks and better communication networks. Poor infrastructural facilities are a key challenge that has affected the integration of the economies of the countries in the European region. Earlier modeling of infrastructure has failed to meet expectations and enhance analysis industrial development and trade among countries. Thus, the authors have come forth to propose a newer and better way to model various public infrastructures in order to be able to analyze trading pattern, industrial locations, and economic welfare.

The main finding of the study is that businesses with ascending returns will often seek to relocate their operations to regions or nations with better and established local infrastructure sin order to make use of the available economies of scale. Better infrastructures mean that there is lower pricing and a higher demand for products in the countries with improved infrastructure[1]. Another finding is that infrastructural development makes a perfect interaction with other factors determining the location of industries. Overall, a highly established international infrastructure will tend to blow up the impacts of local infrastructural differences[2]. Also, developing nations with undeveloped infrastructure would seek to restrain relocation of industries because increased cost of products from foreign nations due to relocations overwhelms the income impact for capital owners who could reap well if there was a better developed domestic infrastructure.

Methodology Used

To examine their ideas on infrastructure and impact on industrial location, the authors have developed a formal model based on Krugman’s work of 1991[3]. However, the model employed in the article takes a different approach especially regarding transportation costs with the assumption that; insufficient infrastructural development means that a significant portion of commodities produced and sold may not reach or be consumed by the purchaser. The model gives a clear distinction between infrastructural development that enhance domestic trading activities and the infrastructural development that ease international trade

Author’s Main Conclusion

A key concluding statement as given by the authors is that differences in local infrastructure can be useful in explaining the direction of the location of industries and also the level of development of global infrastructure can be significant in explaining how sensitive relocation effect of differences in local infrastructure. Thus, the paper indicates how public infrastructures can be important for outlining resources limitations by state governments. States that have a large number of firms and broader industries receive huge amounts of tax revenue at each end of the year, and this revenue is important in financing infrastructure to a better and higher level. In summary, countries should favor and prioritize infrastructure development that enhances domestic trade rather than infrastructure that facilitate international trade.

The study also reveals that there is a positive externality as a result of the research conducted. It is a sign of a larger number of studies performed in the same sphere. The positive externality in this case as suggested by the authors of this paper is that infrastructural development can be used as bait to attract industries from outside the country leading to a better domestic economy. Public infrastructure should be seen to be the key among strategic instruments of a country that could be used to attract other firms from other nations in order to boost industrialization and economic growth in the domestic country. The authors have a made an argument in their conclusion that the implication of relocating industries is that, there is increased domestic welfare and decreased foreign or international welfare. As such, it is important to search for the optimal implementation of infrastructural development policies both in domestic and international levels.

Articles Cite This Article

Article 1[4]

The author of the article acknowledges that Martin and Rogers (1995) were the first researchers to clearly focus on the roles played by infrastructural developments in new geographical conceptual frameworks. They are able to differentiate between infrastructure projects that improve commercial activities in a given region and also those that improve trading between regions. Therefore, the study by Martin and Rogers (1995) is closely related and important to the author of this study who seeks to explain the policies in the European regions and their relations with location theories, and the overall impact on international trade.

Article 2[5]

The authors of the study, Fujita and Thisse, acknowledges Martin and Rogers (1995) as the first individuals to make the initial attempt to discover the effect of infrastructure on the distribution of goods and services I a given region. Martin and Rogers (1995) study is relevant to the author’s quest to research on economics of agglomeration whereby they intend to address the key questions related to the economic activities clusters in smaller regions.

Assessment of Significance[6]

The study is important to facilitate the understanding of key regional economic issues. The paper has comprehensively discussed infrastructure as an economic factor that can affect where industries can be located and the eventual impacts on international trade and the economy in general. The study is the first one to seek to discover the regional impacts of infrastructure on industrial location in a given region. As such, the article has received much appreciations and acknowledgment as evidenced by the number of citations that could be over 1000, and still they are increasing.

In my opinion, the study is significant because it is readable since it has not employed technical language and it also has a flow. Then again, it has made clear illustrations regarding its subject of study; hence, it has made it unproblematic for one to comprehend ideas in it. Further, the paper provides plenty of resources such as other related studies and other sources that make their work credible. Though the authors have employed a complex model in their methodology, they have provided clear explanations to the precision such that the reader can comprehend their ideas.

 

Bibliography

Fujita, Masahisa, and Jacques-François Thisse. “Economics of agglomeration.” Journal of the Japanese and international economies 10, no. 4 (1996): 339-378. Available at https://www.researchgate.net/profile/Jacques-Francois_Thisse/publication/4750385_Economics_of_Agglomeration/links/555b7fe808ae8f66f3ad7970.pdf

Krugman, Paul. Increasing returns and economic geography. No. w3275. National Bureau of Economic Research, 1990.

Krugman, Paul, and Anthony J. Venables. Integration and the competitiveness of peripheral industry. No. 363. CEPR Discussion Papers, 1990.

Krugman, Paul R. “On the relationship between trade theory and location theory.” Review of International Economics 1, no. 2 (1993): 110-122.

Martin, Philippe, and Carol Ann Rogers. “Industrial location and public infrastructure.” Journal of international Economics 39, no. 3 (1995): 335-351. Available at https://www.researchgate.net/profile/Philippe_Martin12/publication/222969296_Industrial_Location_and_Public_Policy/links/02e7e530e13e3d02da000000.pdf

Puga, Diego. “European regional policies in light of recent location theories.” Journal of economic geography 2, no. 4 (2002): 373-406. Available at http://www19.iadb.org/intal/intalcdi/PE/2009/03778.pdf

[1] Krugman, Paul R. “On the relationship between trade theory and location theory.” Review of International Economics 1, no. 2 (1993): 110-122.

[2] Krugman, Paul, and Anthony J. Venables. Integration and the competitiveness of the peripheral industry. No. 363. CEPR Discussion Papers, 1990.

[3] Krugman, Paul. Increasing returns and economic geography. No. w3275. National Bureau of Economic Research, 1990.

[4] Puga, Diego. “European regional policies in light of recent location theories.” Journal of economic geography 2, no. 4 (2002): 373-406. Available at http://www19.iadb.org/intal/intalcdi/PE/2009/03778.pdf  (pg. 24)

[5] Fujita, Masahisa, and Jacques-François Thisse. “Economics of agglomeration.” Journal of the Japanese and international economies 10, no. 4 (1996): 339-378. Available at https://www.researchgate.net/profile/Jacques-Francois_Thisse/publication/4750385_Economics_of_Agglomeration/links/555b7fe808ae8f66f3ad7970.pdf  (p. 373)

[6] Martin, Philippe, and Carol Ann Rogers. “Industrial location and public infrastructure.” Journal of international Economics 39, no. 3 (1995): 335-351. Available at https://www.researchgate.net/profile/Philippe_Martin12/publication/222969296_Industrial_Location_and_Public_Policy/links/02e7e530e13e3d02da000000.pdf