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Industrial Location Economics

Edited by Philip McCann

Because space is not homogenous, economic activities occur in different locations. Understanding the reasons behind this and understanding exactly how industries are spatially organized is the central theme of this book. Industrial Location Economics discusses different aspects of industrial location behaviour from a variety of theoretical and empirical perspectives. Each of the analytical traditions provides insights into the nature of industrial location behaviour and the factors which can influence it.
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Chapter 5: Diversity and Specialization in Cities: Why, Where and When Does it Matter?

Gilles Duranton and Diego Puga


Gilles Duranton and Diego Puga London School of Economics, UK and University of Toronto, Canada 1. INTRODUCTION At a time when most central governments, at least in developed economies, have abandoned the idea of a strongly interventionist industrial policy, a new economic activism seems to be on the rise at the local level. Local authorities frequently strive for specific patterns of economic activities in their jurisdiction. Specific models of industrial organizations are explicitly targeted, with the industrial districts of the Third Italy or Silicon Valley as prime models to be followed.1 While not all of these interventions are necessarily misguided, many seem to lack a clear rationale or even to be based on common misconceptions.2 The issues relating to the composition of cities are necessarily complex. Why are some cities specialized and others diversified? What are the advantages and disadvantages of urban specialization and diversity? To what extent does the structure of cities (and the activities of firms and people within them) change over time? How does the sectoral composition of cities influence their evolution? To answer these and related questions, this chapter starts by distilling some key stylized facts from the empirical literature on cities and the composition of their activities. We then turn to a review of different theories concerned with such issues, and study the extent to which these contribute to our understanding of empirical regularities. We structure these theories into three groups: first, those that are static in nature and focus on...

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