Doctoral Dissertation Research in Economics: Industry Clusters, Trade, and Growth

Columbia University, New York NY

Investigators

Abstract

Industry Clusters, Trade, and Growth Economists have long recognized that a central effect of trade is to change the set of industries in an economy. When industries are heterogeneous, either in their potential for productivity growth, or in their ability to generate spillovers that improve productivity in other industries, these changes will affect a country's growth rate. Simple observation, as well as recent empirical evidence, suggests that such heterogeneity exists to a significant degree. The goal of this project is to understand how trade affects growth through its affect on the composition of industries in an economy. Particular attention will be paid to the role of industry clusters, by which is meant groups of industries where each industry in the cluster has significant productivity spillovers to other cluster industries. The PI addresses this problem using both theoretical and empirical tools. The theoretical contribution is fairly well developed. The results suggest that trade may increase the growth rate of all trading economies, if it concentrates industries or strengthens clusters. Conversely, trade may decrease growth in all trading economies if it weakens industry clusters. These results are new and contradict previous studies, such as those by Young (1991) and Matsuyama (1992), who apply more restrictive and less realistic assumptions. An important implication is that the effect of trade on growth depends crucially on the initial set of industries in an economy and the pattern of industry clusters. The empirical portion of this project, which is still in its infancy, involves constructing a new data set describing the evolution of the economy of Lancashire County, England, from the Industrial Revolution to the present. Lancashire County, birthplace of the industrial revolution, is interesting as a clear case of successful trade-driven and cluster-based development. Another reason for choosing this case is the wealth of data available. These data will be used to illustrate the mechanisms described by the theory, and to test its predictions. Intellectual Merit The intellectual merit of this project rests on the importance of the question it addresses. As the world becomes more globalized the decisions countries make regarding trade policy will become more and more important. The recent experience of East Asia suggests that trade can be a powerful engine for growth, yet in other cases we see that trade need not lead to growth. The PI's work provides a new analytical framework for assessing the effects of trade and suggests how trade, technology, and industrial policies can be used to harness the power of trade to create growth. Furthermore, the results suggest that when trading partners coordinate to design proper policies, all trading partners can benefit. Broader Impacts The broader impacts of this work will be felt through its impact on trade policies, and related technology and industrial policies. With nearly every country involved in significant trading relationships, any knowledge that increases the ability of countries to enact trade policies that increase growth will have wide applicability. Once completed, the PI intends to disseminate the results both through academic publication and through channels focused on reaching policymakers.