Paul Krugman's Geographical Economics and Its Implications for Regional Development Theory: A Critical Assessment

Economists, it seems, are discovering geography. Over the past decade, a “new trade theory” and “new economics of competitive advantage” have emerged which, among other things, assign a key importance to the role that the internal geography of a nation may play in determining the trading performance of that nation's industries. Paul Krugman's work, in particular, has been very influential in promoting this view. According to Krugman, in a world of imperfect competition, international trade is driven as much by increasing returns and external economies as by comparative advantage. Furthermore, these external economies are more likely to be realized at the local and regional scale than at the national or international level. To understand trade, therefore, Krugman argues that it is necessary to understand the processes leading to the local and regional concentration of production. To this end he draws on a range of geographical ideas, from Marshallian agglomeration economies, through traditional location theory, to notions of cumulative causation and regional specialization. Our purpose in this paper is to provide a critical assessment of Krugman's “geographical economics” and its implications for contemporary economic geography. His work raises some significant issues for regional development theory in general and the new industrial geography in particular. But at the same time his theory also has significant limitations. We argue that while an exchange of ideas between his theory and recent work in industrial geography would be mutually beneficial, both approaches are limited by their treatment of technological externalities and the legacy of orthodox neoclassical economics.