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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 Lucas Paradox - 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 between North and South can a have significant impact on the location of firms. Despite differences in aggregate capital to labour ratios, wage and rental rates continue to be the same in both locations. 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 to locate in the North.

Suggested Citation

  • Jang Ping Thia, 2008. "Why Capital does not Migrate to the South: A New Economic Geography Perspective," CEP Discussion Papers dp0895, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0895
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    More about this item

    Keywords

    Firm heterogeneity; capital mobility; economic geography;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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