Location theory addresses the important questions of who produces what goods or services in which locations, and why. As many government policies involve attempts to shift production, one must first examine the basis for the initial location decisions in order to understand the impact of altering incentives.
Nearly 200 years ago, the primary concern of early location theorists, most notably Johann-Heinrich von Thu¨nen (1783 1850), was the optimal location of cities and farms, balancing both land costs and transport costs. In von Thu¨nen’s model, concentric rings of agricultural activity develop around a city. The production of perishable goods and/or goods needing to get to market quickly locate in the rings closer to the city, and other activities such as ranching locate in outer rings. Since von Thu¨nen, many other scholars have proposedmore complex location models, incorporating the production of industrial and agricultural goods and services.
Many of the questions addressed in location theory are highly relevant to international economics. For example, trade theory explains patterns of international production and trade. Similarly,much of the research on foreign direct investment (FDI) looks at wheremultinational firms locate various activities. Policy applications of location theory have examined ways in which different countries, states, and regions can actively compete to be production locations for both trade and FDI. Before turning to the applications of location theory in international economics, it is important to review the basic elements of location theory.
See also foreign direct investment: the OLI framework; New Economic Geography
- Baldwin, Richard, and Paul Krugman. 1989. ‘‘Persistent Trade Effects of Large ExchangeRate Shocks.’’Quarterly Journal of Economics 104 (4): 635 54. Examines the is sue of hysteresis and trade: the notion that permanent changes in the location of production and trade can re sult from transitory economic shocks.
- Brainard, S. Lael. 1997. ‘‘An Empirical Assessment of the Proximity Concentration Trade off between Multi national Sales and Trade.’’American Economic Review 87 (4): 520 44. Finds evidence that proximity to con sumers is an important consideration for the location decisions of multinational firms.
- Brander, James A., and Barbara J. Spencer. 1985. ‘‘Export Subsidies and International Market Share Rivalry.’’ Journal of International Economics 18 (1 2): 83 100. One of many fundamental papers that Brander and Spencer have done relating to strategic trade theory; provides a theoretical background for policy related papers on strategic trade theory.
- Feinberg, Susan, and Michael Keane. 2001. ‘‘U.S. Canada Trade Liberalization and MNC Production Location.’’ The Review of Economics and Statistics 83 (1): 118 32. In this and several other papers, Feinberg and Keane ex amine incremental location decisions of multinational firms, as opposed to entry decisions.
- Head, Keith, John Ries, and Deborah Swenson. 1995. ‘‘Agglomeration Benefits and Location Choice: Evi dence from Japanese Manufacturing Investments in the United States.’’ Journal of International Econom ics 38 (3 4): 223 47. Examines whether clustering is caused by spillovers or other unobservable country and industry characteristics such as factor endow ments.
- Isard, Walter, andMerton J. Peck. 1954. ‘‘Location Theory and International and Interregional Trade Theory.’’ Quarterly Journal of Economics 68 (1): 97 114. A fun damental paper on location theory.
- Javorcik, Beata Smarzynska, and Mariana Spatareanu. 2005. ‘‘Do Foreign Investors Care about LaborMarket Regulations?’’ CEPR Discussion Paper No. 4839. London: Centre for Economic Policy Research. This article, and other research by Javorcik, examines many different features of countries’ economic and policy en vironments and their relation to the location of FDI.
- Krugman, Paul R. 1991. Geography and Trade.Cambridge, MA:MIT Press.Anontechnical overview of the linkages between international trade and location theories.
- . 1993. ‘‘On the Relationship between Trade The ory and Location Theory.’’ Review of International Eco nomics 1 (2): 110 22. Compares and contrasts location theory and trade theory, finding that despite some dif ferences, the theories are asking similar questions and making similar assumptions.
- . 1994. Rethinking International Trade. Cambridge, MA:MITPress. Anintroduction toNewTradeTheory, the intersection of industrial organization economics and neoclassical trade.
- Leamer, Edward E. 1984. Sources of International Com parative Advantage: Theory and Evidence. Cambridge, MA:MIT Press. An in depth and extensive examination of howto test the predictions of neoclassical trade theory. Uses a structural estimation to test the predictions of trade theory using an extensive cross country data set containing detailed information on factor endowments, production, and trade.
- Marshall, Alfred. 1920. Principles of Economics. London: Macmillan. OECD. 2006. International Investment Perspectives. Paris: OECD. Source of information on the worldwide trend toward liberalization of FDI policies.
- Porter, Michael E. 1998. The Competitive Advantage of Nations. New York: Free Press. Combines industrial organization, international trade, and economic geog raphy to investigate why some countries are systemati cally more competitive at producing particular goods and services.