governance. We think that the bias that the problem would lead to in estimation can be drastically reduced by shifting the observation of the interaction between institutions and economic outcomes down to the level of the firm. The firm can more plausibly be assumed to take its institutional setting as given, while the assumption of exogeneity of institutions to aggregate economic outcomes might be difficult to sustain. Changing the unit of observation from the economy as a whole or the industry to the firm level can also facilitate the identification of certain elements of economic geography. At the same time, identification of the effects of geography and institutions should be easier in a crosscountry sample of firms than it could be in a one country sample.<sup>4</sup> In this paper we offer a micro-econometric assessment of the role of economic geography and institutions in Africa’s marginalization in global trade in manufactures in a way that seeks to address these methodological issues.<sup>5</sup> The assessment is based on the estimation of a firm level structural exports equation and its reduced form, on observations on over 14000 manufacturing establishments sampled from 188 cities in 18 developing countries. Ten of the 18 countries and 61 of the 188 cities are African. The structural equation is derived from a new trade theory model of international inequality developed in Redding and Venables (2004). The equation has two transmission channels for the effect of economic geography on firm level exports, which Redding and Venables call “supplier access” and “foreign market access”. Supplier access is an index of the cost at which firms acquire inputs while foreign market access is a proximity weighted measure of the size of export markets. Both variables depend on international and domestic distances as well as on other influences on domestic and international trade costs. The quality of institutions is one such influence. In addition, the domestic component of a firm’s supplier access depends on the diversity and productivity of the broader domestic industry, that is, on what may be loosely called domestic “economic density”. The model also allows for a direct effect of institutions on firm level exports, over and above their influence through supplier access and foreign market access.

Regression of firm level exports on country, industry, and time dummies shows that average exports per establishments are smaller for African firms than for businesses in other regions, which is what one would expect from a cross-country comparison of aggregate figures for manufactured exports. Our estimation of the structural exports equation shows that this is mainly because, on the average, African firms face more adverse economic geography and operate in a poorer institutional setting. A part of the effect of geography is transmitted through foreign market access: African firms are located too far from wealthier international markets. Another part is channeled through supplier access: African firms face steeper input prices. This is partly because of their longer physical distance from (cheaper) foreign suppliers. It is partly due to domestic substitutes for importable inputs being more expensive in Africa. Estimation of the

> 4 This is because cross-country samples would have one more level of variation in geography and institutions.

> 5 Ours is not the only micro-econometric analysis of the determinants of manufactured exports in Sub-Saharan Africa based on World Bank business survey data. Clarke (2005) analyzes similar data- from eight African countries to find that firm level exports are hampered by restrictive trade and customs regulation, but without going into the role of economic geography.  See also Eifert, Gelb and Ramachandran (2005)  for a firm level econometric investigation of the role of institutions and infrastructure in the international competitiveness of African manufacturers.

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