What Determines the Location of Industry? Endowments, Market Potential, and Industry Location in Swedish Regions, 1900-1960

Abstract: In this paper I examine the location of manufacturing industries across Swedish regions, between 1900 and 1960, using a novel dataset on manufacturing employment disaggregated into eight industries and 24 (NUTS-III) regions. By means of OLS estimations of a model where the regional share of employment in an industry is determined by interactions between region and industry characteristics I show that factor endowments and market potential jointly determined the regional distribution of industries. More specifically, industries with increasing returns to scale and backward linkages located in regions with high market potential. Conversely, industries with forward linkages located in regions with low market potential. Regions endowed with agricultural land and woodland attracted industries that intensively used inputs from the agricultural and forestry sectors. The regional distribution of iron ore did not have substantial effects on the distribution of industries. In the postwar period the endowment of an educated population became important in attracting skill-intensive industries. In sum, market potential seems to have been a more important determinant of industry location than factor endowments. The main results are confirmed using an instrumental variables approach (two-step GMM) where market potential is instrumented by predetermined and geographical instruments.