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Empirica 2006 33 255 266 DOI 10 1007 s10663 006 9023 y ORIGINAL PAPER Specialization and concentration a note on theory and evidence Karl Aiginger Esteban Rossi Hansberg Published online 27 October 2006 Springer Science Business Media B V 2006 Abstract We study the prediction of the theory in Rossi Hansberg Rossi Hansberg E 2005 Am Econ Rev 95 5 1464 1491 that under quite general circumstances lower transport costs increase specialization of regions or countries and decrease regional concentration of industries This prediction contradicts the contention of other models and many empirical papers that specialization and concentration should move in parallel We use two data sets on manufacturing industries across US States and EU member countries to show specialization and concentration do not develop in parallel The empirical data replicates some of the features of the divergence predicted in the model Keywords Spatial model of trade Concentration of industries Specialization of countries European integration NAFTA JEL L16 R11 R12 R13 1 Introduction and motivation Specialization of countries in particular sectors and concentration of industries in regions or countries has long been treated as closely related economic phenomena if not identical 1 This contention had been at least supported by the fact that empirical 1 The most prominent example maybe is in Krugman s seminal book Krugman 1991a b p 77 ff where data on specialization in four US regions and four large European countries are used as background for the analyses of regional concentration K Aiginger Austrian Institute of Economic Research WIFO P O Box 91 Vienna A 1103 Austria e mail Karl Aiginger wifo ac at E Rossi Hansberg Princeton University 309 Fisher Hall Princeton NJ 08544 1021 USA e mail erossi princeton edu 123 256 Empirica 2006 33 255 266 studies use the same matrix of country and industry shares of some economic activity variable like value added production or employment to calculate indicators on specialization as well as on concentration 2 In models with two countries and two industries any increase decrease in specialization is tautologically replicated by a parallel increase decrease in concentration Empirical studies then often focus either on specialization or concentration sometimes intentionally sometimes by assuming that these would develop in parallel In the literature models explaining specialization originated mainly in trade theory while models explaining concentration came from location theory Traditional trade theory predicts that countries specialize in products using intensively the relatively abundant input factor Location theory discusses the reasons for agglomeration and dispersion While economies of scale as well as forward and backward linkages favor concentration congestion low costs of immobile factors in the periphery and transport cost favor dispersion The theoretical strands are converging in the New Trade Theory and in the New Economic Geography both

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