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Why Capital does not Migrate to the South: A New Economic Geography Perspective

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Jang Ping Thia
Abstract

This paper explains why capital does not flow from the North to the South - the LucasParadox - with a New Economic Geography model that incorporates mobile capital,immobile labour, and productively heterogeneous firms. In contrast to neoclassical theories,the results show that even a small difference in the ex-ante productivity distribution betweenNorth and South can a have significant impact on the location of firms. Despite differences inaggregate capital to labour ratios, wage and rental rates continue to be the same in bothlocations. The paper also analyses the effects of risk on industrial locations, and shows why'low-tech' industries tend to migrate to the South, while 'high-tech' industries continue tolocate in the North.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0895.

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Date of creation: Nov 2008
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Handle: RePEc:cep:cepdps:dp0895

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Keywords: Firm heterogeneity; capital mobility; economic geography;

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration

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