# **1 Introduction**

Transport and communication costs fell precipitously during the last century, leading many observers to posit that the world has ‘become flat’, that locational differences no longer matter. With the help of cheap transport and communication, business can be done almost anywhere, or so the story goes, leaving policy makers with the impression that we have entered a ‘brave new frictionless’ world. But, if this were true, the costs of trading and transporting goods should no longer influence firms’ location choices and, thereby, the spatial structure of economic is then the for economic to cluster in still activity. Why tendency activity space strong? Why do many industries nowadays still exhibit strong geographic patterns, including new entrants that should face little locational constraints?

We address this seeming contradiction head-on by identifying the causal effect of transport costs on the geographic concentration of industries. Using micro-level commodity flow data and micro-geographic plant-level data, we construct industry-specific ad valorem trucking rates and continuous measures of geographic concentration. We find that, controlling for international trade exposure and input-output links, increasing trucking rates are significantly associated with declining geographic concentration. The effect is large: had trucking rates not fallen between 1992 and 2008, the observed decline in geographic concentration of Canadian manufacturing industries would have been about 20% greater. Our results hold up to a large variety of robustness checks and to instrumental variables estimations that deal with potential endogeneity concerns of our key variables.

Assessing empirically the impact of transport costs on the geographic concentration of industries is important for several reasons. First, it is fair to say that, despite their fundamental theoretical role in spatial modeling, little is still known empirically on how transport costs drive the geographic structure of industries. Second, among the forces that drive the clustering of industries, transport costs have been less studied, much less than the ‘Marshallian’ determinants such as input-output links, labor market pooling, and knowledge spillovers (see Rosenthal and Strange, 2004; Combes and Gobillon, 2015). Consequently, we have little quantitative evidence on the impact of those costs on the geography of industries, and on how their magnitude compares to that of the other forces. Third, transport costs certainly strongly bear on the local composition of economic activity, which is of great policy importance. Changes in transport costs, driven by, e.g., infrastructure investments, inform us on how local economic structure may change (e.g., Duranton, Morrow, and Turner, 2014). These changes play a major role in understanding how regions can weather shocks in international trading environments that have direct repercussions in local labor markets (e.g., Autor, Dorn, and Hanson, 2013; Dauth, Findeisen, and Suedekum, 2014).

Assessing empirically the impact of transport costs on the geographic concentration of industries is also a difficult task. First, we need fine measures of geographic concentration 1