Urbanization

Importance of large cities Larger cities provide agglomeration economies Large number of markets that provide inputs, outputs and labor Transmission of ideas Investment

Urbanization and productivity Agglomeration economies experience economies of scale and reduction in operational cost Reduction in search costs for firms Reduction in search costs for consumers Specialized suppliers

Urbanization and knowledge Cities are learning centers for people, due to transmission of ideas between people who live in close proximity Division of labor and specialization allows for industrial diversity, resulting in economies of scale

Evidence from China (Song and Zhang, 2002) China has experienced rapid urban growth since the economic reforms of 1978: Evidenced by increase in number of cities and increase in urban share of national population. Causes of China’s Urbanization Relationship between urbanization and industrialization Urban reforms of 1984 relaxed restrictions on rural-urban migration China’s open-door policy specifically foreign direct investment and its benefits for economic growth (FDI). Lessons from China: China’s city system exhibits the crucial role of institutional/governmental strategies.

Location of foreign direct investment New foreign firms are attracted to agglomeration economies Agglomeration economies can offset costs associated with unfamiliar laws and customs in new environments The presence of other foreign firms play a role in location decision of new firm Industrial cluster allow for the pooling of specialized labor

Concluding thoughts Although through most of history human population has lived in rural areas, the world’s population is increasingly becoming urbanized. While urbanization has usually been attacked for its negative consequences, its positive consequences are often looked over. Cities will continue to be an important source of economic growth.