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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 30:
The trade-off between agglomeration forces and relative costs: EU versus the “world” Evidence from firm-level location data 1974-1998

Pontus Braunerhjelm () and Per Thulin

Abstract: The theoretical prediction of a trade-off between production costs and agglomeration economies advanced in recent “new economic” geography models has – despite its important policy implications – not been exposed to empirical testing. Based on a standard model where labor mobility is assumed to differ between two regions - the “European Union” (EU) and the “world” - the empirical analysis shows that a ten percent increase in relative wages decreases entry by MNCs by approximately nine percent in EU, but only by three percent in the “world.” Or, put differently, a ten percent increase in relative wages in EU requires an increase by 26 percent in agglomeration to keep production levels unaltered. To our knowledge, this is the first attempt to empirically estimate this trade-off.

Keywords: FDI; agglomeration; relative costs; (follow links to similar papers)

JEL-Codes: F15; F20; F23; (follow links to similar papers)

50 pages, May 9, 2005

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