Real Estate Markets and the Location of Economic Activity

In determining the location of their economic activity, firms take many factors into account. According to neo-classical theories, natural advantages are the most important determinants of location. According to new economic geography theories (Fujita, Krugman and Venables (1999)), market access and low-cost access to intermediate goods matter most for location. The availability and affordability of industrial terrains is another key factor for firms that want to set up their production. It is obvious that this key factor combines both existing strands of literature. Regions with abundant land will have lower land prices, therefore attracting more firms. However, often these regions will be less favourably located as far as the access to the markets for final and intermediate goods is concerned. Firms will therefore have to trade off terrain costs against transportation costs. For governments willing to attract firms it is highly important to know what drives their location decisions. The purpose of this paper is to get a better insight in the link between the real estate market and the location decision of firms. In doing this we focus on the Flemish market. If a government wants to attract firms to its country it is clear that it will have to compete as far as the availability of attractive industrial terrains is concerned. The central question we address in this paper is whether a government should opt for a region-specific policy investing in a region as a whole - rather than for a sector-specific policy directed towards a sector irrespective of the region it invests in. Using investment data of different manufacturing sectors we provide a first answer to this problem.