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Testing the 'home market effect' in a multi-country world: A theory-based approach

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Author Info

  • Kristian Behrens

    ()
    (CORE, Université Catholique de Louvain)

  • Andrea R. Lamorgese

    ()
    (Research Department, Bank of Italy)

  • Gianmarco I.P. Ottaviano

    ()
    (Università di Bologna, FEEM and CEPR)

  • Takatoshi Tabuchi

    ()
    (Faculty of Economics, University of Tokyo)

Abstract

We propose a theory-based approach to testing the presence of the 'home market effect' in a multi-country world. Our framework extends Krugman's (1980, Am. Econ. Rev. 70(5), 950-959) model, in which the appeal of a country as a production site depends on both the relative size of its domestic market ('attraction') and its relative proximity to foreign markets ('accessibility'). We show that the extended model predicts a home market effect only after the actual production and trade data have been corrected for the impact of countries' differential access to world markets. This can be achieved through a simple theory-based linear filter. We propose a series of non-parametric sign- and rank-tests that are closely related to those used in factor proportions theory. When applied to a cross-section of OECD and non-OECD countries, the filtered data performs better than the raw one and our results strongly support the presence of home market effects.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 561.

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Date of creation: Sep 2005
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Handle: RePEc:bdi:wptemi:td_561_05

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Keywords: home market effect; new trade theory; multi-country models; market potential; economic geography;

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References

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Citations

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Cited by:
  1. Crozet, Matthieu & Trionfetti, Federico, 2008. "Trade costs and the Home Market Effect," Journal of International Economics, Elsevier, vol. 76(2), pages 309-321, December.
  2. Amiti, Mary & Smarzynska Javorcik, Beata, 2008. "Trade costs and location of foreign firms in China," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 129-149, February.
  3. Suedekum, Jens, 2005. "The Home Market Shadow," IZA Discussion Papers 1462, Institute for the Study of Labor (IZA).
  4. Brülhart, Marius & Trionfetti, Federico, 2009. "A test of trade theories when expenditure is home biased," European Economic Review, Elsevier, vol. 53(7), pages 830-845, October.
  5. Juan Labraga, 2009. "Política Comercial y Política de Infraestructura en el MERCOSUR," IDB Publications 9328, Inter-American Development Bank.

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