Trade, Geography and Industry Growth in U.S. Manufacturing:

[Author Affiliation]John Francis, , , , francis@latech.eduYuqing Zheng, , , , yz248@cornell.edu[Acknowledgment]We thank three anonymous referees for their helpful comments. In addition, we thank Otis Gilley for his insight.1. IntroductionIt is well known that location and market size play important roles in explaining industry outcomes. In an influential article, Harris (1954) demonstrated that proximity to both final demanders and input suppliers are important determinants of the distribution of firms across space. Firms are more likely to gravitate to locations where access to markets is greater. Consequently, industries in locations with better access to markets should experience more rapid growth. Harris (1954) measured the size of the market in a particular location by what he termed market potential . Market potential is calculated as the sum of the incomes of all locations weighted by each location's distance to the location under consideration. In this context, distance is interpreted as a proxy for trade costs. He found that market potential is highly correlated with local industry growth.1 The New Economic Geography (henceforth NEG) literature, beginning with the influential article by Krugman (1991), has sought to develop theoretical foundations for how spatial interactions, like market potential, influence industry outcomes. Furthermore, much of the NEG literature emphasizes the role of access to international markets. More recently, an emerging empirical NEG literature has begun to bring these models to the data. Much of the existing empirical work in this area focuses on how geography and access to markets affects the distribution of income across space, treating manufacturing as a single entity. In this article, we develop a NEG model linking access to international markets to industry growth as measured by both employment growth and growth in the real value of shipments across a disaggregated set of industries. We empirically test the model using data from a cross section of U.S. manufacturing industries over the period from 1984 to 1996. We find strong evidence supporting the idea that access to markets promotes industry growth.The urban and regional economics literatures have long recognized the relationship between market size, agglomeration economies, and industry growth. Glaeser et al. (1992), Henderson, Kuncuro, and Turner (1995), Black and Henderson (1999), Partridge and Rickman (1999), and Dobkins and Ioannides (2001) all provide evidence that industry growth (or industry productivity growth) is positively correlated with measures of market size. However, very few studies have examined the relationship between market size and industry growth in the context of a structural NEG model.2 The foundation of much of the NEG literature is the idea that industries in countries (or regions) with the ability to reach larger markets will be more appealing places for firms to locate. Such locations are more attractive for both intermediate goods suppliers (backward linkages) and final goods suppliers (forward linkages) because sales will tend to be greater where access to markets is greater.3 A straightforward conclusion from this framework is that industries with better access to large markets should experience higher industry growth.The empirical NEG literature has begun expanding quite rapidly over the past several years. Much of this literature focuses on deriving structural estimating equations consistent with the theory that account for spatial interactions between regions. The majority of these studies have focused on explaining the variation in factor returns across geographic space. This has typically been achieved by estimating the market-clearing condition, usually called the wage equation , from a model consistent with the basic NEG framework. Brakman, Garretson, and Schramm (2004), Mion (2004), Redding and Venables (2004), Hanson (2005), Head and Mayer (2006), and Amiti and Cameron (2007) all provide evidence that countries (or regions) with better access to large markets have higher wages. …