Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2006:16: Shackling the footloose firm? Factor interests and majority voting

Carl-Johan Belfrage () and Fredrik Gallo ()
Additional contact information
Carl-Johan Belfrage: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Fredrik Gallo: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: F12; F13; F15

27 pages, August 11, 2006

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