Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 504: Trade and Location with Horizontal and Vertical Multi-Region Firms

Karolina Ekholm () and Rikard Forslid ()
Additional contact information
Karolina Ekholm: The Research Institute of Industrial Economics, Postal: P O Box 5501, SE-114 85 Stockholm, Sweden
Rikard Forslid: Lund University and CEPR, Postal: P O Box 7082, SE-220 07 Lund, Sweden

Abstract: This paper analyses the effect on agglomeration tendencies of allowing firms to become multi-region firms in a standard model of trade and location. More specifically, we introduce horizontal and vertical multi-region firms into the core-periphery (CP) model developed by Krugman (1991). The introduction of horizontal multi-region firms dampens the strong agglomeration effects found in the CP model by making the range of trade costs for which the core-periphery equilibrium occurs smaller. The introduction of vertical multi-region firms that can separate the location of headquarter activities from the location of production has two counteracting effects. First, headquarters have a strong tendency to agglomerate, and, in this sence, agglomeration tendencies are strengthened. Second, actual production tends to be more spread out, and, in this sense, they are weakened.

Keywords: Trade; Location; Agglomeration; Multinational firms

JEL-codes: F12; F15; R12

35 pages, October 1, 1998

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