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 8: Footloose capital, market access and the geography of regional state aid

Gianmarco I.P. Ottaviano

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

Extract

Gianmarco I.P. Ottaviano INTRODUCTION 8.1 Market access plays a key role in many recent models of international trade. Such models study the impact of frictions in goods and factors mobility on the location of imperfectly competitive industries in the presence of increasing returns to scale (Helpman and Krugman, 1985). Their central result is the so-called home market or market size effect (henceforth, HME), according to which, in the case of a two-country economy, the location with larger local demand succeeds in attracting a more than proportionate share of firms in the aforementioned industries. In the case of more than two countries, rather than local demand, what matters is overall market access (Krugman, 1993). For example, a small central country may have better overall market access than a large peripheral one and, thus, despite its local demand disadvantage, may end up attracting a larger share of imperfectly competitive firms.1 This pattern of demand-driven specialization maps into trade flows and generates the theoretical prediction that large central countries should be net exporters of goods produced under increasing returns and imperfect competition.2 From an empirical viewpoint, those predictions seem to find some support in the data. For example, Feenstra, Markusen and Rose (1998; 2001) argue that the HME is crucial to understand the empirical success of gravity equations, which explain bilateral trade flows in terms of incomes and distance between trade partners. Using disaggregated trade data from Statistics Canada World Database, they show that the HME appears to be relevant in both...

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