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„With reference to the new economic geography, examine the impact of economic integration on the distribution of economic

activity across regions and countries”

Attila Németh12.06.2014.

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Contents• Economic Geography• Arguments• Approaches• Factors and forces• Changing economic environment• New Economic Geography• Difference between NEG and Location theories• Space narrowing factors• Production and products• Transnational companies• Virtual and real space• Summary• References

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Economic Geography• A regional competitiveness that is closely related to economic

geography and regional economy, the development of regional economy and typology of regions have been defined previously.• Porter emphasizes that geographical concentration of a business

enhances the productivity, innovation and sector export.• According to Paul Krugman, for a international company which is

trading on the entire world needs to be organized on global and regional levels, and also the firm must know the various geographic locations endowments and differences.

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Arguments• NEG cannot be readily or adequately expressed in mathematical form • Krugman himself, who argued that such factors were the province of sociologists• NEG models based on the highly simplified assumptions• NEG models relating to economic structure, consumer and firm behaviour, competition,

and transport costs, can provide credible representations of the real world they are meant to explain.

• Economic geographers place production at the centre of spatial economic development • Non-economists, this might sound like a banal and obvious gain, but it is important.

Stated Cities and regions can develop simply because people decide that they like to go there and production can follow them

• More collaboration between economists and economic geographers could lead to more impact of the economic activities to countries or regions, and it could bring more ‘Krugman moments’

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Approaches• The results are strongly influenced by the researcher's methodological approach. • Neoclassical location theorists, following in the tradition of Alfred Weber, tend to

focus on industrial location and use quantitative methods.• Marxist political economy, growing out of the work of David Harvey: the new

economic geography which takes into account depend on social, cultural, and institutional factors in the spatial economy.• Paul Krugman and Jeffrey Sachs have also analysed many characteristics related to

economic geography. According to Krugman has gone so far as to call his application of spatial thinking to international trade theory the NEG, which directly competes with an approach within the discipline of geography that is also called "new economic geography".

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Factors • Regional economic geography examines depends on the economic conditions of

particular regions or countries of the world.• There is a war between forces that tend to promote geographical concentration.• Which Focus on production, exchange, distribution and consumption of items of

economic activity.• And Examine material flow, commodity flow, population flow and information

flow from different parts of the economic activity system.• Analysing of flow and production, amongst industrial areas, rural and urban

residential areas, transportation site, commercial service facilities and finance and other economic centres are linked together in an economic activity system.• Thematically, economic geography can be divided into the following sub disciplines:

geography of agriculture, industry, international trade, resources, transport and communication and finance.

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Forces• The economic geography, focus on a more limited set of forces,

however, real world is more complex.• Beside the natural things there are two types of forces (centripetal

and centrifugal), and the tension between just one centripetal and one centrifugal force.• Centripetal forces (towards the centre) as market-size effects, thick

labour markets, pure external economies, on the other side are centrifugal (away from the centre) forces like immobile factors, land rents, pure external diseconomies.

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Changing economic environment• The linkages amongst Forces effect and as the force for concentration, immobile

resources creating the tension necessary to keep of this model interesting.• Linkage effects, which are mediated by transportation costs, are naturally tied to

distance, so it is access to immobile factors. On the other hand, thickness of the labour market, while it must have something to do with distance, does not lend itself quite so easily to being placed in a spatial setting.• The central thrust forces of the NEG work to date, in short, has been driven by

considerations of modelling strategy toward an approach that concentrates on the role of market-size effects in generating linkages that foster geographical concentration, on one side, and the opposing force of immobile factors working against such concentration on the other.

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New Economic Geography• According to Krugman, New Economic Geography exactly in order to

become "new" because the economic geography are integrated into classical trends and theoretical models. These models are in addition to the classical theory of localization in highly rely on the "new growth" and "new trade theory" trends as well. Many economic activities are markedly concentrated geographically.

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Geographers vs. Economists and limitations

• Both geographers and economists are interested in change in the spatial pattern of the economy, in how territories develop under open economy conditions, and in identifying and measuring the forces of change.

• The core-periphery model of the NEG is basically a central place model with labour mobility added: economies come from firm-level product variety (units), and home market effects (local consumption). -no true spatial externalities (no natural differentiation or even comparative advantage).

• Monopolistic competition framework of the NEG - allows firms to set their own prices and to produce differentiated goods under increasing returns to scale. - no strategic interactions ( no quasi-rents to place-bound actors and firms and regional economies) therefore, there can be equilibrium, as economists need there to be.

• In the complex world there are strategic interactions and rents, and these are parts of the real way that agglomerations function.

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Difference between NEG and location theory• Location theory is partial equilibrium• By contrast, the NEG consists of full general-equilibrium models, in which budget

constraints on both money and resources are carefully specified and honoured; the geographical distributions of population, demand, and supply are endogenous, and it is, indeed, the two-way feedback between location decisions by individual agents and these distributions that is the main source of interesting stories.• Location theory-especially the central place theory of Christaller and Lösch,

describing planning solutions rather than market outcomes.• NEG is all about what spatial equilibrium might exist, and perhaps emerge through

a dynamic process, when individuals are choosing locations to maximize their welfare given what other individuals are doing.

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„Space narrowing” factors• Information technology the basic of the globalization• New transportation and communication technologies.• The development of communication has transformed the space-time relationships

between all parts of the world. Increasingly disappear the spatial and time limits which are previously separated from each other international economies.• That's not affected equally all geographic locations.• Geographical sites, which are able to take advantage of the benefits of this

communication innovations, the important destinations for world of information.• Rapid technological development is very important and essential to the

production, and the production processes of change.

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Production system is changing• The Fordist production system characterized by a very large flow-line

production units, which produced a type of high-volume standard products are mass-consumption purposes.• The new production system, is flexible: instantly changeable

corporate organization and most of the close relationship between companies and customers, and the needs of the market.• The strong market competition in the manufacture of new products,

and constant innovation is essential for the profit of the companies, and in general the companies afloat.

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Five stages of products by Vernon: introduction, growth, maturity, decline and obsolescence

• In general we can say that the competitive advantage is more and more changing from research and development to the price, which requires a different combination of factors of production.• New product is needed very significant R & D expenditures, and highly

trained workforce, product-specific technology. • In the growth needs shifting to the requirement of basic skilled manpower,

and to production technology and cost minimization.• Indisputable fact that because of the modern communication technologies

the geographical boundaries of national economies lose their former separation, and the earlier strong regional concentration of economic processes.

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Parallel development• In the 21st century the regional de-concentration of economic and

the concentration processes is re-emerged at the same time, notably through the established research and development activities by technological areas, in other words, industrial districts. In the case of industrial districts in the locality, a district wide web connection is the focus. This local business network main points are the following: the local business community, local government agencies, local universities and research institutes, as well as local non-state public institutions.

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Transnational companies• The geographical distribution of parent companies and subsidiaries,

however, are extremely inequality. Basic factors of localization for international business policy decisions are that nearly 80% of the parent transnational companies are located in developed countries, but almost 90% of their foreign subsidiaries operate in the low and middle-income countries. East and South East Asia regions and Central and Eastern European regions.

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International investments• Four main types of international investments according to the nature

of the investment: exploiting local resources, market-oriented, efficiency improvement, effect to the strategic benefits.• The choice of the firms also done by property-specific, localization

and internalization advantages.• The most accepted theory which is eclectic theory creating by

Dunning.• The eclectic theory paradigm is based on the assumption that

operation will avoid transactions in the open market when internal transactions carry lower costs.

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Spatial structure, worldwide sales and intra-firm trade

Three aspects of spatial structure:• intra-firm trade (growing, but transfer price is a problem),• company headquarters geographic location (increasing strategic role),• the unit of production based on localization (production cost).• The spatial structure of the company, the headquarters strengthens the

concentration, while the organization of the global level of production forwards the company to the direction of the spatial de-concentration.• Amongst the world's largest companies would be required further

investigation on the ratio of spatial structure between concentration and de-concentration.

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Dickens’ four basic type of production

• Centralised globally focused: the total production process localized to a single geographic location and the products reach the world market through the marketing activities and the sales network of transnational corporations. (luxury)

• „Stand-alone" or often is called „Multi-domestic": production is only for the host country market. The production system related to the size of the regional market. (soft drinks)

• Regional specialization: production network involves a spatial division of the production based on comparative advantages. Each region specializes in the production of a specific good and imports from other regions what it requires.

• Transnational vertical integration: production of semi-finished products occur in different locations geographically and for the final assembly these parts are sent to other kinds of geographical location within the framework of intra-industry and intra-firm trade, using the communication and transportation technology. (automotive)

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Virtual- and Real space• The principle of electronic data can be delivered anywhere in the

world, regardless of the actual geographical distance, or whether there is even what time of day.• The most important leading sectors of the new economy are in the

cyber space, the hardware and software manufacturing, telecommunications, biotechnology, the film industry, financial services and tourism.• Real space is loosing its importance and these high-tech sectors

switch from manufacturing-based economies to the digital economy.

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Summary• Due to the global economy, the spatiality is more and more important issue. In the

past, usually spatial organization based on nation level, for now this is fundamentally transformed to regions. Key elements of the spatial organization of the global economy can be summarized as follows: • The spatial concentration is took part of the global economic activities. (That is

one of the most important findings what Paul Krugman is justified.)• The spatial de-concentration processes can definitely be detected.• Relative geographic position loses significance. • Availability of geographic locations is growing importance, since the real space is

transformed to virtual space.• Space of flows instead of space of place approach seems to be justified.• Complex spatial structure is emerging, which is called by Dicken, a stage of

constant change in the inequalities, and the key word now of the virtual spatial organization is network.

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