on the US suggests that most services, particularly, wholesale retail, finance, insurance and real estate (FIRE) and other services have become more concentrated while most other sectors, such as ‘manufacturing’ and ‘farming’, have exhibited de‐concentration and are located on lower cost urban periphery or in small cities and towns, perhaps to take advantage of lower rents and wages. Evidence suggests that nearly all agglomerated services industries are highly urbanized, whereas many manufacturing industries agglomerate in smaller cities or rural areas. Studies on US and French services firms suggest that service industries are localized at very short distances and are primarily situated in the heart of a few big cities and strongly benefit from highly localized technological spillovers.<sup>62</sup> What explains this sort of structural change in urban form where central locations are increasingly being replaced by services rather than manufacturing firms? Some services require close proximity with consumers (e.g. professional services) while others can be transmitted over the internet. Services that rely on ICT can substitute for proximity, and are less likely to agglomerate even in the same county. Services and manufacturing agglomerate for different reasons: while manufacturing agglomerates for reasons related to labor pooling due to occupational specialization, services agglomerate because of knowledge spillovers. The important difference in explaining urbanization across the sectors, however, is the share of output going to consumers, which is positively correlated with urbanization for manufacturing industries and negatively correlated with urbanization for services industries. Thus, the cost of transporting goods to customers could affect location decisions differently for manufacturing and for services.<sup>63</sup> Furthermore, innovations in communication technologies fragments a firm’s activities – when the front‐unit activity needs to be in touch with other firms’ headquarters, it will agglomerate in the CBD, while the back‐unit activity will be located in the suburbs.<sup>64,65</sup> The shift from sectoral to functional specialization also implies that service focused business centers are few and large whereas manufacturing centers are more numerous and smaller in size. Such structural changes are not unique to the US; German and Chinese data also reveal a similar pattern of spatial development of activities.<sup>66,67</sup> Other reasons explaining such structural changes include the maturity of the industry. In a mature industry the localization economies have been mostly exploited, and knowledge spillovers have lost much of their

> 62 See Glaeser and Kohlhase (2004), Desmet and Fafchamps (2006), Arzaghi and Henderson (2008) and Desmet and Rossi‐ Hansberg (2014) for the case of US and Barlet et al. (2013) for the study on France. The theoretical argument for this observation is explained in Desmet and Ross‐Hansberg (2009, 2014).

> 63 See Glaeser and Kohlhase (2004) and Kolko (2010) for more details on the effect of these factors as well as the differences in the two sector with respect to co‐agglomeration forces.

> 64 Ota and Fujita (1993), Duranton and Puga (2005). Henderson and Ono (2008) provide a very comprehensive evidence related to the spatial separation of firm headquarters and production facilities.

> 65 See Duranton and Puga (2005). Using data from micro data set on auxiliary establishments in the US from 1977 to 1997, Davis and Henderson (2008) find that headquarters of firms agglomerate in the CBD of large metro areas to take advantage of services and production externalities (which decline with distance) in the form of the availability of differentiated local service input suppliers and the scale of other headquarter activity nearby.

> 66 We know of only one study, that is, by Rossi‐Hansberg et al. (2009), that examines the within city sectoral pattern of urban development. They document an increase in the share of employment, and establishments in the suburbs or city edges. They find that the shift in employment from CBD to suburbs in the case of US was not driven by any one particular industry. During 1980‐ 1990, the average employment share at the center declined from 0.42 to 0.38 in manufacturing and from 0.47 to 0.43 in services. That is, average employment shares declined by about the same percentage in both sectors. This information is, however, not indicative of whether the share of services relative to manufacturing increased at the city center.

> 67 Example of such accounts on San Francisco bay area is found in Walker (2004) and on Pittsburg is described in Muller (2001).

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