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Discussion Paper Details

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Title: On the development strategy of countries of intermediate size - An analysis of heterogenous firms in a multiregion framework

Author(s): Rikard Forslid and Toshihiro Okubo

Publication Date: January 2011

Keyword(s): agglomeration, firm heterogeneity, multi-country model, relocation costs and trade liberalisation

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Forslid, R and Okubo, T. 2011. 'On the development strategy of countries of intermediate size - An analysis of heterogenous firms in a multiregion framework'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8178