GVC participation data are from the OECD’s Trade in Value Added database (TiVA). We find that a unit standard deviation (SD) increase in domestic value added (DVA) in exports of intermediate products (an index of participation in GVCs) is associated with a 0.1 SD decline in the _Zipf_ coefficient. Spatial concentration is strongly and significantly correlated with GVCs involving knowledge-intensive business services and high-tech manufacturing. Even with low-tech manufacturing, the correlation with spatial dispersion is negative, albeit not statistically significant, implying that participation in GVCs does not help with the spatial dispersion of economic activity. The findings on the service sector are particularly important for public policy given their rising shares in GVCs.<sup>3</sup> These findings are consistent with alternative measures of participation in GVCs (DVA in foreign exports; ratio of forward to backward linkages) and spatial concentration (e.g. inverse of the Gini coefficient).

An important econometric challenge is to address the potential endogeneity of GVCs with the urban size distribution. The point here is that changes to the urban system come from unobserved sources which are associated with country level decisions to integrate in global supply chains. Consider “infrastructure readiness”, which is a key driver of participation in GVCs. In China, the government pumped four trillion yuan (about US$ 520 billion) in 2008 towards promoting the development of inland regions through rural infrastructure projects including construction of roads, railroads and airports, as well as the supply of affordable housing (WTO, 2011). Such investments that deeply alter the spatial allocation of domestic economic activity also make global production more attractive in these locations, suggesting the possibility of reverse causality. Using real effective exchange rates and net FDI inflows as instruments to address the endogeneity between GVCs and the urban size distribution, our results confirm the strong and positive relationship between spatial concentration and GVC participation.

Our findings are consistent with an emerging body of evidence showing that economic integration across borders is associated with greater spatial concentration within national borders (Dagupta and Grover, 2021; Redding and Fagjelbaum, 2018; Cosar and Fagjelbaum, 2016). As the nature of linkages are upgraded from assembly tasks to adding greater value in manufacturing and services, spatial concentration is likely to rise. Policy makers may well want to reorient their efforts to enabling a lot more people with the necessary skills needed to move and find opportunities in urban agglomerations; the cities themselves may need more attention to relieve congestion in land, housing and commuting.

The rest of this paper is organized as follows. We discuss the relevant literature on trade and cities in section 2. Section 3 describes the empirical strategy and Section 4 provides the main empirical findings. Section 5 concludes.

# **2. Cities, GVCs and trade in tasks**

The focus of our investigation is on global value chains and its implications for the system of cities/ urban system in countries. The neoclassical urban systems theory introduces agglomeration as an outcome of the tension between the centripetal force arising from pure external economies and the centrifugal force arising from urban congestion costs (e.g. Henderson, 1974, 1977, and 1988). Because spillovers are assumed to be industry specific, the neoclassical theory predicts the emergence of specialized cities. This approach explains the existence of an urban system with different city sizes because the relative strength of external economies is presumably stronger in some industries vis-à-vis others.

The neoclassical urban systems theory is, however, aspatial and does not provide information on the location of cities. This shortcoming is addressed by the “New Economic Geography” (NEG) framework (Krugman, 1991a, b, 1993; Fujita et al. 1999). The NEG literature opened up the black box of agglomeration economies by deriving these externalities from an interaction of economies of scale at the plant level with

> 3 Over 40% of the world’s cross-border trade in value added terms comes from services. In some countries such as Singapore, Iceland, India and the EU27, the services content of exports is above 50% (Lanz and Maurer, 2015).

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