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The New Economic Geography : a survey of the literature [ Working Paper 16-02 - ]

This overview of the literature dedicated to the new economic geography intends to highlight the main mechanisms, which contribute to explain the spatial concentration of economic activity, in particular the formation of cities and industrial districts. This should provide some guidelines for an empirical analysis of the determinants of the spatial distribution of economic activity in urban areas in Belgium and for suggestions of economic policy instruments capable of influencing location choices.


Dominique Simonis (A)
A : Auteur, C : Contributeur

  Type de publication

Working Papers

Le Working Paper présente une étude ou analyse menée d’initiative par le BFP.

The main contribution of the new economic geography is to deal with some of the classic questions of regional and urban sciences related to location in a coherent theoretical framework, and to explain the endogenous mechanisms driving geographic concentration of economic activity and leading to core-periphery patterns. In a pioneering text, Krugman (1991a) has shown that these forms of concentration are linked to the existence of agglomeration economies, according to which the spatial concentration itself creates a positive economic environment.

According to the new economic geography, the self-reinforcing process deriving from the spatial concentration of economic activity arises from the interplay of various factors: scale economies, transport costs, backward-forward linkages of firms, which determines the location of economic activity. In the presence of increasing returns to scale, each producer is inclined to concentrate its production in a single location. In order to minimise the transport costs, the producer will have a tendency to locate where the local demand is the most important. But demand concentrates precisely where other firms have already located. If a specific economic activity develops particularly in a given region, due to history, this region will attract the firms of the other regions, thus reinforcing the advantage deriving from the size of its own market. This circular process of cumulative causality leads in the end to the concentration of the industry in a single area.

The effects from the concentration of economic activity can be reinforced by the existence of externalities such as technology and knowledge spillovers through the improvement of information flows (informal contacts facilitated by proximity), access to a diversified range of intermediate goods and complementary services to industrial activity, and the benefits from specialised high-skilled labour availability. The economic literature also makes a distinction between location economies associated with the firms belonging to a same sector and the urbanisation economies associated with the firms from all sectors being located in a same place. The accounting for the interactions between technological, sectoral and geographical proximity comes from the research work on endogenous growth, which considers these externalities as the engine of growth.

However, congestion effects exist besides these agglomeration economies. According to these effects, concentration brings about an increase in the prices of the immobile local factors (land, natural resources, agricultural workers), and of goods that can lead to an inverse process of dispersion of economic activity. These dispersion forces, which allow to explain the existence of several concentration places, are linked to transport costs, land use costs, labour market competition and competition on the market of goods and services, and to negative externalities (congestion in transport, pollution).

From an economic policy point of view, it is very important to understand the processes underlying the location decisions of firms and their possible impact on industrial structure and the dispersion of economic activity within a given geographical area, because the predominance of agglomeration forces could create inequalities between the core and the periphery. The central idea of the new economic geography is that the spatial distribution of economic activity results from the interaction between centripetal forces and centrifugal forces, whose nature can vary according to the spatial scale considered: local, regional or international. While the role of pecuniary externalities, emphasised by the new economic geography, is especially relevant to explain agglomeration effects at the European scale, empirical studies tend to show that the existence of technology and knowledge spillovers, encouraged by specialised high-skilled labour availability, may well prove to be a better explanation of agglomeration at the local level. Thus, this mechanism is very important to understand, for example, the impact of information and communication technology on the spatial configuration of cities.


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