The Location of Economic Activity. First versus Second Nature Core-Periphery Theories

The location of economic activity is a topic that has occupied economists’ minds for a very long time now. Where do firms locate? What determines location decisions? And more importantly, what is the influence of increasing integration on location outcomes? First nature theories are able to explain location decisions exogenously. They refer to the presence of natural resources as the main determinant of location. They can not explain though why firms keep on clustering in a certain region although there are no natural resources that would make them opt for that particular location. There are however second nature theories that are able to explain these endogenous agglomeration outcomes. The goal of this paper is threefold. First of all, the backbone core-periphery model of the second nature – New Economic Geography – theories will be discussed. Two of its basic variations will be tackled extensively and contrasted with a more recent variation of the core-periphery model focussing on imperfections in the labour market. In discussing each variation of the core-periphery model, the focus will be on the link between transport costs and location that each theory predicts. Secondly, these predictions will be confronted with the empirical findings concerning location. Finally, the question of the relative importance of first versus second nature theories will be dealt with.