Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2010:28: On the Development Strategy of Countries of Intermediate size - An Analysis of Heterogenous Fims in a Multiregion Framework

Rikard Forslid () and Toshihiro Okubo ()
Additional contact information
Rikard Forslid: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Toshihiro Okubo: Kobe University, Postal: Research Institute for Economics & Business Administration (RIEB), Kobe University, 2-1, Rokkodai cho, Nada-ku, Kobe, 657-8501 JAPAN

Abstract: This paper compares two policies: trade cost reduction and firm relocation cost reduction using a three-country version of a heterogeneous-firms economic geography model, where the three countries have different market (population) size. We show how the effects of the two policies differ, in particular, for the country of intermediate size. Unless the intermediate country is very small, it will gain industry when relocation costs are reduced, but lose industry when trade costs are reduced. The smallest country loses industry in both cases, but only experiences lower welfare in the case of lower relocation costs. Thus, the ranking of the policies from the point of view of the two small and intermediate countries tends to be the opposite.

Keywords: Agglomeration; firm heterogeneity; multi-country model; trade liberalisation; relocation costs

JEL-codes: F12; F15; F21; R12

26 pages, December 20, 2010

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