During the last three decades industrial activity has spread from Japan to several of its East Asian neighbours. Between 1965 and 1993, manufacturing grew much faster than any other sector in South Korea and Taiwan. In 1993 both economies had a larger fraction of workers employed in manufacturing than did Japan. The spread of industry from country to country is usually viewed primarily as the consequence of changes within each country, whether it is policy reform enabling specialization according to comparative advantage, government interventions targeted at solving investment coordination failures, or simply rapid factor accumulation starting from low initial levels.

In Discussion Paper No. 1354, Research Affiliate Diego Puga and Research Fellow Anthony Venables develop an alternative approach to explain the way in which industry spreads between countries. They assume that all countries are similar, even identical, in underlying structure. The distribution of industry, however, may not be uniform across countries, and industrialization may spread in a series of waves from country to country. Their approach is based on a tension between agglomeration forces, which tend to hold industry in a few locations, and wage differences which encourage the dispersion of industry. Initially all industrial sectors are concentrated in one country, tied together by input-output links between firms. Growth expands industry more than other sectors, bidding up wages in the country in which industry is clustered. At some point firms start to move to areas with lower wages, and when a critical mass is reached industry expands in another country, raising wages there. Lastly, the paper establishes the circumstances in which industry spills over, which sectors move out first, and which sectors are more important in triggering a critical mass.

The Spread of Industry: Spatial Agglomeration in Economic Development
Diego Puga and Anthony J Venables