Multinational Firms’ Location and the New Economic Geography

Multinational Firms’ Location and the New Economic Geography

New Horizons in International Business series

Edited by Jean-Louis Mucchielli and Thierry Mayer

This book analyses how foreign direct investors choose their locations, whilst exploring the forces which shape international economic geography. Although these two issues are, to some extent, inter-related, researchers have only recently acknowledged the similarity of economic geography and international business approaches to the empirical assessment of likely causes of the degree of spatial concentration observed in many modern industries.

Chapter 5: Trade liberalization and the internal geography of countries

Matthieu Crozet and Pamina Koenig-Soubeyran

Subjects: business and management, international business, economics and finance, regional economics, geography, economic geography, urban and regional studies, regional economics


Matthieu Crozet and Pamina Koenig-Soubeyran INTRODUCTION 5.1 The need to restructure a large number of European policies before launching the final part of the enlargement of the European Union (EU) gathers consensus among European policy-makers. One of the areas of European action to which particular attention will be directed is that of the European regional policies, and two new sources of European funding have already been created specifically for these countries in order to finance regional development. In this context, it appears relevant to go one step further and to analyse the link between the economic integration of the Central and Eastern European countries (CEECs) with the EU and the economic geography of these countries: how does trade liberalization have an impact on regional development patterns within countries? The relation between trade and the location of production inside countries has been explicitly studied by recent models of the new economic geography literature, based on the original model of Krugman (1991). Indeed, Krugman and Livas (1996), in a two-country three-region framework, suggest that a decrease in international transaction costs between two countries may foster the dispersion of economic activity inside the home country. Conversely, Alonso-Villar (2001), Monfort and Nicolini (2000) and Paluzie (2001), respectively in a three-country, two-country four-region, and in a two-country three-region framework, show that trade liberalization is more likely to enhance agglomeration of economic activity inside the country opening to trade. Some empirical work on the topic validate Krugman and Livas’s result: Ades and Glaeser (1995) study...

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