FDI 3
20 flashcards · Other · by Daniel F.
Clustering forces
forces leading economic activity to concentrate in space
Dispersion forces
forces leading economic activity to spread out in space
Types of scale economies
Internal: Average costs fall in the firm’s own scale of production -> cost advantage of large firms External: Average costs of a firm fall as the output produced in the region where the firm resides increases cost advantage of large/dense locations
External scale economies types
Localization economies: Benefits from a larger number of firms in the same industry and in the same location. Urbanization economies: Benefits from a larger number of different industries in the same location.
Urbanization economies
Arise from between-industry economic interactions Industrial diversity fosters ideas and innovations. Larger variety of input suppliers and potential buyers. Variety of job opportunities attracts highly educated workers.
Localization economies
Arise from within-industry economic interactions Knowledge spillovers between firms. Access to specialized labor, services and other resources that all firms in that industry require (input sharing). Competitive pressure which promotes innovation and productivity.
simple model of external scale economies
expansion of an industry/city creates production advantages for all firms in the industry initial location choice may be driven by comparative advantages, luck or policy these locations experience lasting production advantages This attracts more firms, making these locations even more attractive
Variation in clustering across industries/firms: service manufacturing large city small city new company established company
Services cluster more densely than manufacturing Less land intensive greater importance of knowledge spillovers services providers need other service In manufacturing, more clustering in high-tech industries high-skilled labor using industries Different cities perform different functions Larger cities tend to be more diversified and oriented toward services and R&D. Smaller cities tend to be specialized in particular industries. New firms tend to start in large cities (benefits from face-to-fac…
role of distance in economic activity
less trade between far-away countries
gravity model of trade
Trade between two countries is higher when: Geographical distance is smaller and countries have access to waterways. Institutional and cultural differences are smaller. Countries share a common border, common language, have a trade agreement. Trade barriers are lower and exchange rates less volatile
Overcoming geographic distance
requires transportation and communication technology and creates transport costs lower the transport costs, easier it is
Quantifying transport costs
Indirectly, by measuring the price difference of a good between different locations Shipping time. Freight prices. Communication costs. Use of shipping quotations: CIF and FOB.
unit transport cost rate (TC)
Free on board (FOD) Cost Insurance & Freight (CIF)
FOB (Free on Board)
Value of the traded good at the port of shipment includes purchase price of the good, cost of transporting to the port of shipment, loading the carrier
CIF (Cost Insurance & Freight)
Value of the traded good at the port of destination includes FOB value, cost of carriage, insurance
Transport costs tend to be higher for
perishable goods. heavy/bulky items. countries far away from major trading partners (distance!). landlocked countries.
fall of transportation costs through history
1st globalization pre-1910 steam boats and trains long distance trade based on comparative advantages (inter-industry trade) within country specialization 2nd globalization era post-1950 improvements is road, air, water transportation ICT revolution trade in similar products between similar countries (intra-industry trade) fostering of GVCs better air transportation allowed perishables and short product cycle products
Scale effects in transportation
Freight costs per ton are lower if the ship/plane operates at full capacity Transport costs on popular routes are lower; this encourages trade between these locations and leads to even more demand for transportation and lower costs
Transport policies in developing countries
Limited competition and corruption in the transport sector reduces building of infrastructure and drives up prices makes accessing world markets difficult The physical transportation infrastructure has to be build but it also has to be efficient Because of scale effects, it is difficult for small developing countries to provide cost-effective transportation infrastructure
improving market access of developing countries
Foster regional cooperation to facilitate sharing of transportation infrastructure, harmonizing regulations and border crossing procedures. Increase competition in the transport sector.