Transport costs and the locations of upstream-downstream sectors in China and Indonesia

Abstract

This paper presents evidence of different upstream-downstream location configurations for China and Indonesia, leveraging provincial input-output (IO) tables. While both upstream and downstream sectors in China exhibit a relatively even geographical distribution across provinces, Indonesia's sectors (even upstream raw material-processing ones) are notably concentrated in Jakarta and Java. To better account for these location differences, we develop a stylized spatial new economic geography model where an upstream competitive raw material processing and a downstream CES sector locate together or separately in different Nash equilibria. Both are located at the large market if transport costs are high, separately given moderate transport costs, and again together but towards the geographic center when transport costs are low. Given the pull of raw materials, low transport costs thus spread upstream and downstream sectors away from the large market. Conversely, low raw material access cost results in both locating in large market.