Industry Connections and the Geographic Location of Economic Activity

Abstract

This paper provides causal evidence that inter-industry connections can influence the geographic location of economic activity. To do so, it takes advantage of a large, exogenous, temporary, and industry-specific shock to the 19th century British economy. The shock was caused by the U.S. Civil War, which sharply reduced raw cotton supplies to Britain's important cotton textile industry, causing a four-year recession in the industry. The impact of the shock on towns in Lancashire County, the center of Britain's cotton textile industry, is compared to towns in neighboring Yorkshire County, where wool textiles dominated. The results suggest that this trade shock reduced relative employment growth in industries that were more related to the cotton textile industry, in towns that were more severely impacted by the shock. The impact persists for over two decades after the end of the U.S. Civil War, suggesting that temporary shocks, acting through inter-industry connections, can have long-term impacts on the distribution of industrial activity across locations.