The spatial selection of heterogeneous firms

We show that heterogeneous firms choose different locations in response to market integration. Specifically, decreasing trade costs lead to the gradual agglomeration of efficient firms in the larger country where they have access to a bigger pool of consumers. In contrast, high-cost firms seek prote...

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Bibliographic Details
Published in:Journal of international economics 2010-11, Vol.82 (2), p.230-237
Main Authors: Okubo, Toshihiro, Picard, Pierre M., Thisse, Jacques-François
Format: Article
Language:English
Subjects:
Competitive firms
Economic geography
Economic integration
Economics and Finance
Firm heterogeneity
Firm heterogeneity Spatial selection Trade liberalization Economic geography
Humanities and Social Sciences
Location of enterprises
Location of industry
Spatial models
Spatial selection
Trade liberalization
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Summary:We show that heterogeneous firms choose different locations in response to market integration. Specifically, decreasing trade costs lead to the gradual agglomeration of efficient firms in the larger country where they have access to a bigger pool of consumers. In contrast, high-cost firms seek protection against competition from efficient firms by locating in the smaller country. However, when the spatial separation of markets ceases to be a sufficient protection against foreign competition, high-cost firms choose to set up in the larger market. Hence, the relationship between economic integration and international productivity gap first increases and then decreases with market integration.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2010.07.003