1 Resource Endowments, Externalities and Transport Costs: An Exploration of Alternative Explanations of Regional Production Structures in Mexico Prepared for the 6th European Trade Study Group Conference

Traditional trade theories explain international exchanges by relative resource endowments, focusing on issues such as country-product specialisation, as well as developments in factor prices and its welfare implications. An important issue –often overlooked- is the spatial impact of international trade. However, recent contributions from the new economic geography offer important explanations as to how trade and location of economic activity are linked. One important result is that both concentration and dispersion may be stable outcomes of firm-location behaviour. Such location processes are subject to two sets of countervailing forces stimulating either concentration or dispersion, subject to transportation costs. Mexico offers an interesting case for the analysis of the relative importance of the alternative explanations of production structures in the form of resource endowments, externalities and transport costs. Mexico’s industrialisation strategy was until 1985, based on import substitution, when accession to GATT gave rise to an export promotion strategy further transformed by NAFTA in 1994. Using panel-data analysis, the paper examines to what extent the alternative theories (neo-classical and new economic geography) offer explanations for the development of regional production structures in Mexico at the state level