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 7: The home market effect in a Ricardian model with a continuum of goods

Federico Trionfetti

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

Extract

7. The home market effect in a Ricardian model with a continuum of goods Federico Trionfetti INTRODUCTION 7.1 An interesting new development in the international trade literature has made important advancements in the attempt to distinguish empirically between various models of international specialization and trade. Research in this stream has developed along both a theoretical and an empirical path that are complementary to each other. Theoretically, the task is to identify a testable discriminating criterion; that is, an observable relationship between endogenous and exogenous variables that is compatible with one model and incompatible with the alternative(s). The empirical task is to verify whether such a prediction is observed empirically. If the predicted relation is observed empirically, then the model with which it is compatible is empirically the true model to the exclusion of all other models. The discriminating criteria so far utilized in the literature are variants of the ‘home market’ or ‘market size’ effect. Broadly speaking the market size effect establishes a relation between demand and output: it says that – ceteris paribus – a country’s share of world demand is reflected more than proportionally on the country’s share of world output. Thus, a country with larger than average demand (market) for good X will host a more than proportionally larger than average share of world output of good X. The market size effect is a prediction of models characterized by increasing returns and imperfect competition, while it is typically not a prediction of constant...

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