Agglomeration in the global economy: A survey of the ‘new economic geography’

This review of recent contributions reveals common conclusions about the effects of integration on location. For high trade costs, the need to supply markets locally encourages firms to spread across different regions. Integration weakens the incentives for self-sufficiency and for intermediate values of trade costs pecuniary externalities induce firms and workers to cluster together, turning location into a self-reinforcing process. However, agglomeration raises the price of immobile local factors and goods, so for low transport costs firms may spread to regions where those prices are lower. * This paper was produced as part of the Programme on International Economic Performance at the UK Economic and Social Research Council funded Centre for Economic Performance, London School of Economics. It is based on an earlier survey by the authors titled ‘L’agglomération dans l’économie mondiale’. Financial support from the European Commission through a TMR grant (Ottaviano) and from European Science Foundation is gratefully acknowledged. The authors thank Tony Venables and Stefano Manzocchi for helpful comments.