Scandinavian Working Papers in Economics

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

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
Additional contact information
Pontus Braunerhjelm: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Per Thulin: The Center for Business and Policy Studies, Stockholm, and Linköping University

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

JEL-codes: F15; F20; F23

50 pages, May 9, 2005

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