Industrial Hubs

Abstract

Agglomeration economies, including economies of scale, better employee–employer matching and supplier–buyer matching, and knowledge spillovers, play a key role in the formation of large cities and industrial clusters. This chapter introduces models of economic geography that explain the process of agglomeration and formation of industrial clusters. These models describe how the reduction of transportation costs and development of labour productivity affect the formation of industrial clusters. Then we discuss important issues in empirical analysis, such as selection bias, sample selection bias, relocation effects, and external validity. Finally empirical studies on agglomeration economies, and the effects of industrial zones and infrastructure improvement, are reviewed. Empirical results of the effectiveness of industrial zones and infrastructure improvement are mixed, suggesting the importance of careful diagnosis of the economic conditions and an understanding of economic structure for choosing appropriate policies and interventions.