This paper estimates the agglomeration benefits that arise from vertical linkages between firms in the context of Indonesia. The analysis is based on international trade and economic geography theory developed by Krugman and Venables (1995). We identify the agglomeration benefits off the spatial variation in firm level nominal wages. Unusually detailed intermediate input data allow us to more accurately capture spatial input/output linkages than in previous studies. We take account of the location of input suppliers to estimate cost linkages; and the location of demand from final consumers and other firms to estimate demand linkages. The results show that the externalities that arise from demand and cost linkages are quantitatively important and highly localized. An understanding of the extent and strength of spatial linkages is crucial in shaping policies that seek to influence regional development.

The production of high-quality goods is often viewed as a precondition for export success and economic development. We provide the first evidence that countries' import tariffs affect the rate at which they upgrade product quality. Our analysis uses highly disaggregated data covering exports from 56 countries across 10,000 products to the United States using a novel approach to measure quality. As predicted by distance-to-the-frontier models, we find that lower tariffs are associated with quality upgrading for products close to the world quality frontier, whereas lower tariffs discourage quality upgrading for products distant from the frontier.