Trade Liberalization and the Geography of Production: Agglomeration, Concentration, and Dispersal in Indonesia’s Manufacturing Industry

Abstract

The effect of the liberalization of trade on the spatial concentration of economic activities is not straightforward. It has been widely argued that protectionism increases spatial concentration as firms locate close to the main domestic markets. However, it has also been argued that an expansion of international trade primarily favors existing industrial centers and therefore leads to increased regional inequalities. Against the background of ongoing debates in both mainstream economics and in geography, we examine the spatial concentration of manufacturing in Indonesia between 1980 and 1996, a period when Indonesia substantially liberalized its trade regime. The high concentration did not decrease during this period, and establishments that engaged in international trade were actually comparably concentrated. We discuss some possible explanations for the spatial concentration in Indonesia and conclude that a host of factors may affect the outcome of trade liberalizations. In particular, the spatial configuration of the national settlement system is a potentially important factor in this regard.