Industrial Location in Developing Countries

Posted: 8 Aug 2008

See all articles by Uwe Deichmann

Uwe Deichmann

World Bank - Development Research Group (DECRG)

Somik V. Lall

World Bank

Stephen J. Redding

Princeton University

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Date Written: Fall 2008

Abstract

Despite a diminishing role in industrial countries, the manufacturing sector continues to be an engine of economic growth in most developing countries. This article surveys the evidence on the determinants of industry location in developing countries. It also employs micro data for India and Indonesia to illustrate recent spatial dynamics of manufacturing relocation within urban agglomerations. Both theory and empirical evidence suggest that agglomeration benefits, market access, and infrastructure endowments in large cities outweigh the costs of congestion, higher wages, and land prices. Despite this evidence, many countries have tried to encourage industrial firms to locate in secondary cities or other lagging areas. Cross-country evidence suggests that fiscal incentives to do so rarely succeed. They appear to influence business location decisions among comparable locations, but the result may be a negative-sum game between regions and inefficiently low tax rates, which prevent public goods from being funded at sufficiently high levels. Relocation tends to be within and between agglomerations rather than from large cities to smaller cities or lagging regions. Rather than provide subsidies and tax breaks, policymakers should focus on streamlining laws and regulations to make the business environment more attractive.

Keywords: O18, R12, R38

Suggested Citation

Deichmann, Uwe and Lall, Somik V. and Redding, Stephen J. and Venables, Anthony J., Industrial Location in Developing Countries (Fall 2008). The World Bank Research Observer, Vol. 23, Issue 2, pp. 219-246, 2008. Available at SSRN: https://ssrn.com/abstract=1212076 or http://dx.doi.org/lkn007

Uwe Deichmann (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Somik V. Lall

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/slall

Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~reddings/

Anthony J. Venables

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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