DP1435 Regional Integration, Scale Economies and Industry Location in the European Union

Author(s):	Marius Brülhart
Publication Date:	July 1996
Keyword(s):	Economic Geography, European Union, Regional Integration, Scale Economies
JEL(s):	F12, F15, R12
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1435

This paper analyses the effects of regional integration on the location of increasing-returns industry and the resulting pattern of trade. Theoretically, it is shown that regional integration may initially lead to a dispersion of industry inside the customs union. Below a certain threshold of internal trade costs, however, industry concentration in the central member country will again increase. This non-monotonic relationship with regional integration also applies to equilibrium levels of intra-industry trade (IIT). A strictly monotonic negative relationship is found between, on one hand, the degree of scale economies and, on the other hand, industrial concentration both in the central country and intra-union IIT. Empirical evidence for the European Union lends support to some of the theoretical predictions. Employment in scale-intensive industries tends to be concentrated at the centre of the EU, and IIT is relatively low in these sectors. An IIT growth reversal is detected for the scale-intensive industries, which supports the non-monotonicity predicted by the model.