Thus, bottom- right cells of the tables refer to the share of crop production in areas with high agronomic potential and good connectivity (low travel times) to urban centers. The two tables show similar patterns. Crop production is concentrated in locations with good agronomic potential, and production shares increase with better access (lower travel times) to urban centers. An interesting observation is that crop intensities drop in locations closest to urban centers, as presumably land for agriculture competes with alternate urban land use (which may be of higher value).

## <u>Producers internalize geographic constraints</u>

29. The interaction between good agronomic potential and access to markets is further examined with an econometric model. This model uses data from the IHS2 on the extent of cash crop production by a household, and explains the decision to specialize in cash crops (cash crops more than a third of all crop production) using agronomic potential and access to domestic and international markets.

30. At a micro-level, the patterns echo the summary tables above. As expected, being located in high cash crop agronomic potential areas increases the probability of specializing in cash crop production (see Table 9). Interestingly, this beneficial effect of good agronomic potential diminishes as a farmer is located in remote areas (longer travel time to urban centers) (column 2). Travel time to urban centers has an inverted-U shape relation (column 3). In remote areas, reducing travel time to urban centers, or better road connectivity, encourages a household’s specialization in cash crop production. However, in areas very close to urban centers, households may be discouraged from specializing in cash crops due to competition with urban land uses. Therefore, a farmer’s cash crop specialization, or selection of high-yield crop production, is maximized in the areas with intermediate road connectivity. Based on the econometric estimates, the “optimal” distance where a farmer maximizes cash crop production is 2.2 hours from a major city.

31. Similarly, proximity to international markets generates similar results. Households very close to international markets are likely to specialize in non-agricultural activities. However, at intermediate distances there is an increase in production of cash crops, which drops in regions with large distances to markets.

# **Prospects for manufacturing**

32. In deciding where to set up a business, entrepreneurs are most likely to choose an area that offers conditions for maximizing profits. A recent survey of the empirical literature identifies the main drivers of location decisions by firms in developing countries (for details, see Deichmann and others 2008): These include _Factor prices_ ; Infrastructure—cost and quality of complementary utility services, including water, electricity, and telecommunications; _Market Access_ – the availability of transport and communications to access markets; _Agglomeration economies_ —the presence of firms in own industry (localization economies) and firms in other industries (urbanization economies); _Human capital_ —the availability of skilled workers; and _Local regulations_ —land use and zoning, tax policies.

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