Developing countries, Developed countries, Economic geography, Econometric model

Kumagai, Satoru

English

Research Papers in Economics

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TitleIntroduction New Challenges in New Economic Geography
Author(s) Kumagai, Satoru
Citation
New Challenges in New Economic Geography. edited by
Satoru Kumagai. Chiba: Institute of Developing Economies-
JETRO, 2010. 1-8
Issue Date 2010-03
URL http://hdl.handle.net/2344/1018
Rights  1 
Kumagai,  Satoru, e d .  2 0 1 0 .  New  Challenges  in  New  Economic  Geography. C h i b a :  I n s t i t u t e  o f  
Developing Economies. 
 
INTRODUCTION 
Satoru KUMAGAI 
 
New economic geography (NEG), or spatial economics, is one of the frontiers of social 
science. Paul Krugman, winner of the Nobel Prize in Economic Sciences in 2008, is one 
of  the  largest  contributors  to  the  creation  of  this  field,  which  is  at  the  forefront  of 
economics. His famous paper (1991) presents an important model, now known as the 
core-periphery  model,  which  provides  a  common  platform  for  discussion  of 
‘geography’  in  the  language  of  economics.  Actually,  location,  space  and  geography 
have long been themes of concern in diverse academic domains, particularly in urban 
economics, location theory and regional science (Fujita and Thise 2009).   
  Following the great strides in theoretical aspects in the 1990s as represented 
by  the  milestone  book  of  Fujita,  Venables  and  Krugman  (1999),  various  empirical 
studies  and  simulations  have  appeared.  The  related  fields  are  wide-ranging,  from 
international economics and urban economics to an engineering-based approach. We 
recognized a need to survey these fields extensively and identify how NEG, or spatial 
economics, is related to our own research topics when they involve ‘space’ as a critical 
element.         
Fortunately, there are some useful survey studies in this field. Fujita and Mori   2 
(2005) is the most comprehensive study among these. The authors present an overview 
of the important topics in the development of NEG thus far, such as urban and regional 
systems,  agglomeration  and  trade,  the  fragmentation  of  firms  and  production, 
agglomeration and growth, and the home market effects. Then, the authors identify the 
four new frontiers of NEG, namely, 1) unification of urban economics and NEG, 2) 
development  of  complex  numerical  simulation  models,  3)  incorporation  of  the 
endogenous development of the transport sector in the model and 4) clarification of 
spatial linkage through the creation and transfer of knowledge.   
  For the unification of NEG and urban economics, Tabuchi and Thisse (2006) 
propose an economic geography model that incorporates commuting costs, which is a 
fundamental factor in an urban economic model. They derived richer sets of equilibrium 
than the standard core-periphery model by assuming one of the two goods in the model 
is  costlessly  traded.  They  also  found  that  introduction  of  non-tradable  consumption 
goods generates urban hierarchy.   
  For the development of complex numerical simulation models, Bosker et al. 
(2007) constructed an NEG-based model that incorporates a realistic geography of the 
EU.  Kumagai  et  al.  (2008)  also  constructed  an N E G -based  model  that  features  a 
realistic geography of East Asia. 
  To  incorporate  the  endogenous  transport  sector,  Behrens  et  al.  (2009) 
introduce a model that incorporates the transport sector in which each firm maximizes 
its profit. The authors found that the decline in transport costs induced by the entry of 
transport firms leads to consumer welfare losses and a widening of the gap in living   3 
standards in different regions in the long run. 
  For spatial linkage through the creation and transfer of knowledge, Berliant 
and  Fujita  (2009)  propose  a  theoretical  model  of  knowledge  production  for  the 
two-person case. They focus their attention on the differences and commonalities in the 
knowledge that each person possesses. The model shows that laissez-faire interaction 
tends to produce too much common knowledge, i.e., to be less innovative than the most 
productive state.   
  Other than these studies, there is new research being conducted in various 
related  fields.  Behrens  et  al.  (2007)  analyses  the  relationship  between  economic 
integration  and  welfare  by  developing  a  theoretical  model,  concluding  that  1)  the 
benefits of integration often appear following the appearance of the costs of integration 
and 2) the development of infrastructure in a country may reduce the welfare of other 
countries,  so  international  coordination  of  infrastructure  development  is  required. 
Markusen and Venables (2007) incorporate the ‘fragmentation’ of production in the 
traditional trade model and assert that ‘fragmentation’ pushes up the welfare of the 
world as a whole, while countries which have integrated production might find their 
welfare reduced because the price of goods will be lowered.       
  On  the  empirical  side,  Brakman  et  al.  (2006)  show  that  the  spatial  wage 
structure  in  the  EU  actually  follows  the  prediction  of  NEG,  and  Rice  et  al.  (2006) 
analyze the relationship between productivity and income by sub-national region in the 
UK,  concluding  that  the  proximity  to  the  ‘center’  of  economic  activity  boosts  the 
productivity of a region, although that effect disappears rapidly as the travel time from   4 
the center increases beyond ‘80 minutes.’ 
 
In this volume, we attempt to present research from the frontier of NEG. However, it is 
certainly not our intention to cover all issues on the frontier of NEG comprehensively; 
the five authors here have pursued five different challenges in their respective fields. 
  Chapter  1  endeavors  to  show  that  intermediate  goods  trade  is  positively 
related not only to the importing country’s demand but also its neighbors’ demand for 
finished goods. Studies to explore the determinants of trade from the viewpoint of new 
economic  geography,  especially  those  analyzing  trade  using  the  notion  of  ‘market 
access,’ are a new trend in empirical trade studies. The regression results using gravity 
equations confirm that the market access of finished goods is an important determinant 
of intermediate goods trade. 
  Chapter 2 explores the interaction between upstream and downstream firms in 
a two-region general equilibrium model. How to incorporate the layered transactions 
among firms in the theoretical model is one of the important issues. For instance, many 
countries actually set lower tariff rates for intermediate goods and higher tariff rates for 
final goods. The results derived from the model in this chapter imply that such tariff 
rates settings tend to preserve the symmetric spread of upstream and downstream firms 
in both regions, and continued tariff reduction may cause core-periphery structures to 
appear.  In  the  case  where  the  supply  of  skilled  workers  is  abundant  and  circular 
causality between upstream and downstream firms operates, the model predicts that (1) 
two interior steady states, at most, exist, (2) when the asymmetric steady states exist,   5 
they are unstable and (3) the location of firms displays hysteresis when the transport 
costs of intermediate manufactured goods are sufficiently high. 
  Chapter  3  proposes  a  new  mechanism  that  links  innovation  and  networks  in 
developing  economies  to  identify  explicit  production  and  information  linkages.  The 
new economic geography in the era of the ‘knowledge society’ is a recent field that has 
not yet been extensively explored. The author investigates the testable hypotheses of 
these linkages using survey data gathered from manufacturing firms in four East Asian 
countries, i.e., Indonesia, Thailand, the Philippines, and Vietnam. The author found that 
firms which dispatched engineers to customers achieved more innovations than firms 
which did not. In addition to this, mutual knowledge exchanges stimulate product and 
process  innovations.  These  findings  support  the  hypothesis  that  face-to-face 
communication  and  strong  complementarities  among  buyer-seller  networks  have 
different roles in product and process innovation.   
  Chapter 4 seeks to describe the challenges in developing realistic numerical 
simulation models based on new economic geography; this is an important field of 
endeavor, but existing literature is sparse. Specifically, adopting the IDE Geographical 
Simulation Model (IDE-GSM) as an example, the author discusses some problems in 
developing a realistic simulation model for East Asia. One key concept is to use a 
‘topology’ representation of geography, rather than a ‘mesh’ or ‘grid’ representation or 
simple ‘straight lines’ connecting each city which are used in many other models. In 
addition to this, the author demonstrates that the modal choice model adopted in the 
IDE-GSM, which considers both money and time costs, seems to work well, furnishing   6 
the model with another realistic feature. 
  Chapter  5  aims  to  identify  the  roles  of  product  differentiation  and 
geographical differentiation as sources of profit for firms in China. The author employs 
a simple idea from the recently developed method of empirical industrial organization, 
in  which  ‘location’  is  one  of  the  long-standing  issues  of  importance.  Theoretically, 
location choice and product choice have been considered as analogues in differentiation. 
However in the real world, the choice of these strategies will result in a substantial 
difference in firm behavior and the development process of the industry. The analysis, 
which utilized original survey data on location of market, product type difference and 
price, demonstrates that product differentiation mitigates pressure on price competition 
more than geographical differentiation does, although 70 percent of the firms retains 
geographical monopolistic position as well.     
 
It is our hope that the chapters in this volume will expand the frontier of new economic 
geography and related fields a bit further. 
 
References 
Behrens,  Kristian;  Gaigne,  Carl;  Ottaviano,  Glanmarco  I.P.;  and  Jacques-Francois 
Thisse. 2007. Countries regions and trade: On the welfare impacts of economic 
integration. European Economic Review. Vol.51, Issue 5. pp.1277-1301.   
Behrens, Kristian; Gaigne, Carl; and Jacques-Francois Thisse. 2009. Industry location 
and welfare when transport costs are endogenous. Journal of Urban Economics.   7 
Vol. 65, Issue 2. pp. 195-208. 
Berliant,  Marcus;  and  Masahisa  Fujita.  2009.  Dynamics  of  knowledge  creation  and 
transfer: The two person case. International Journal of Economic Theory, Vol.5 
No.2. pp.155-179. 
Bosker,  Maarten;  Brakman,  Steven;  Garretsen,  Harry;  and  Marc  Schramm.  2007. 
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Brakman, Steven; Garretsen, Harry; and Marc Schramm. 2006. Putting new economic 
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Fujita,  Masahisa;  Paul  Krugman;  and  Anthony  J.  Venables.  1999.    The  Spatial 
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Adding Geography to the New Economic Geography. CESifo Working Paper No.

Countries regions and trade: On the welfare impacts of economic integration.

Dynamics of knowledge creation and transfer: The two person case.

Increasing returns, monopolistic competition and international trade.

Industry location and welfare when transport costs are endogenous.

New Economic Geography: An appraisal on the occasion of Paul Krugman’s

Putting new economic geography to the test: Free-ness of trade and agglomeration in the EU regions. Regional Science and Urban Economics,

Regional Specialization, Urban Hierarchy, and Commuting Costs.

Spatial Determinants of productivity: Analysis for the regions of Great Britain.

The Spatial Economy: Cities, Regions, and International Trade.

Toshitaka Gokan; Isono Ikumo; and Souknilanh Keola.

Introduction New Challenges in New Economic Geography

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Introduction New Challenges in New Economic Geography

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