importance.<sup>68</sup> This makes agglomeration in such an industry expensive if land is a critical factor of production. Hence, as spillovers weaken, mature industries such as those in the manufacturing sector tend to move out of CBD. Contrarily, services industry has relatively recently been affected by a major GPT in the form of ICT and many firms in the industry have not fully adapted to the new technological paradigm.<sup>69, 70</sup> A recent study by Jed Kolko suggests that services do not agglomerate as much at a county level vis‐à‐vis manufacturing but more so at a zip code level (with zip codes being much smaller than counties). This trend is in contrast to that of manufacturing firms that tend to agglomerate in the same county to save on transport costs and also access to similar resources (natural or labor) but they do not need to co‐locate within the same the zip code (and thus economize on land rents).<sup>71</sup> It is noteworthy that the observed trends in the developed world may not necessarily be mirrored in a developing country context. In fact, there are similarities between the current developing country trends and that of the U.S.A. in the late 19th and early 20th centuries. Manufacturing facilities in developing countries often locate in large cities, perhaps because learning and adaptation are critical to the successful transfer of technology from abroad. However, as the industry matures and technology standardizes, higher land rents are likely to push the firms out to peripheral locations. Such a process is in the beginnings in China and Indonesia. However, in India, both services, and to a certain extent manufacturing, are increasingly concentrating in high‐density clusters.<sup>72</sup> Based on the theoretical explanations, this suggests that services in India are “young", whereas manufacturing is not as “mature" as in the developed world. This should not be surprising though. Nonetheless, there are differences even across manufacturing. Research shows that organized manufacturing is moving to rural areas, away from city centers while the reverse is true for unorganized manufacturing. Thus, it seems that unorganized sector seems to be driving the overall results for Indian manufacturing.<sup>73</sup>

# **III. Is the Market Equilibrium Optimal? Some Policy Options**

In the presence of externalities, equilibrium urban form generated by profit maximizing firms and utility maximizing workers may not be the most efficient spatial structure. For instance, in a polycentric environment, where urban sub‐centers are formed from the tension between centripetal and centrifugal forces in the form of production externalities versus congestion or commute costs, there are distinct

> 68 Duranton and Puga (2001)

> 69 Hobijn and Jovanovic (2001)

> 70 See Desmet and Ross‐Hansberg (2009). The increased geographic concentration of services has also been studied by, Glaeser and Ponzetto (2010), who suggest that this phenomenon may be driven by lower transport and communication costs.

> 71 Specifically, the average Ellison‐Glaeser county level agglomeration index for services industries at the six‐ digit North American Industry Classification System (NAICS) level is 0.0068, while that for manufacturing is 0.0132.

> 72 Desmet et al. (2015). India's experience is not common to all fast‐growing developing economies. The spatial growth pattern of China looks more similar to that in the U.S. than to that of India. See Baum‐Snow et al (2012) for China and Rothenberg (2013) for Indonesia.

> 73See Ghani et al. (2012). One of the factors that could be leading to de‐concentration of Indian manufacturing includes delicensing that took place in the 1990s (Fernandes and Sharma, 2012).

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