Working Papers, Department of Economics, Lund University
No 2006:16:
Shackling the footloose firm? Factor interests and majority voting
Carl-Johan Belfrage ()
and Fredrik Gallo ()
Abstract: Adding majority voting to a simple new economic geography
model, we analyse under which circumstances politically determined barriers
to international firm relocation exist. Two countries, differing in market
size, consider abolishing restrictions on firm mobility. Eliminating these
restrictions will fully or partially de-industrialize the small country as
firms relocate to the larger market. We show that there is unanimous
support for (resistance against) the removal of obstacles to firm
relocation in the large (small) country if the country size difference is
small, while a large difference in size gives rise to domestic conflicts of
interest and international cross-factor alignments of interests.
Furthermore, trade liberalisation may have facilitated the removal of
barriers to firm relocation in large countries. Finally, political
integration between trading countries is likely to contribute to the
removal of barriers to firm relocation, and support for (resistance
against) such a development comes primarily from the immobile factor in the
large (small) country.
Keywords: barriers to firm relocation; new economic geography; majority voting; public policy; (follow links to similar papers)
JEL-Codes: F12; F13; F15; (follow links to similar papers)
27 pages, August 11, 2006
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