Industrial agglomeration and factor market segmentation with empirical applications to Indonesia

The first part of this dissertation examines agglomeration economies (externalities stemming from the spatial clustering of economic activity) in the manufacturing sector. Major methodological shortcomings of the existing empirical literature are identified and illustrated using an Indonesian data set. Special attention is given to the degree of data aggregation, implicit and explicit assumptions concerning returns to scale in the production process, and model specification. It is shown that in order for empirical results to be meaningfully interpreted, a disaggregated, industry specific modelling strategy is required.;In the second part of the dissertation, factor market segmentation is examined. A model is developed to investigate anecdotal case study findings that segmentation is caused by government policies (such as credit subsidies), institutional constraints, and market imperfections. This model is applied to the Indonesian weaving industry. Results show that the ratio of the price of capital to the price of labor decreases as firm size increases. The findings are robust even after accounting for different, intra-industry production techniques. Using this model, the social costs of segmentation are calculated. These costs result from distortions in the allocation of factors of production within a given production technique or through selection of an entirely different production process. For the Indonesian weaving industry, the social costs of intra-technique substitution are shown to be small, whereas the costs of inter-technique substitution are substantial.;In the final part of this dissertation, a model is developed to explore the effects of a government offering rationed credit at concessionary rates. It is shown that firms' capital intensities increase and the mean scale of operation becomes larger. Furthermore, if information is important to loaning authorities and/or to firms, there is additional incentive for industry to concentrate in core regions. Finally, because of assumptions on the distribution of income between owners of capital and labor, such a policy raises income inequality and, at least in the short-run, contributes to the incidence of poverty. Empirical support for the model is provided using data from Indonesia.