The effects of transport costs revisited

The aim of this paper is to study the location decisions of upstream and downstream industries when transport costs in each sector are analysed separately. By using a new economic geography model built on Venables (1996), it will be shown that the effects of cost reductions in transporting final goods are different from those in intermediate goods. Our analysis suggests that regional convergence is more the consequence of improvements in transportation between upstream and downstream firms than those between firms and consumers. This will help us to better understand the forces driving these kinds of models while giving an additional explanation to the differences between Krugman's (1991) results and those of Venables (1996).