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The Home market effect with heterogeneous firms

Author

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  • Ha Nguyen

    (CREA, University of Luxembourg)

Abstract

This paper examines the home market effect in the framework of heterogeneous firms. The paper finds that not only trade costs but also fixed trade costs cause the home market effect and the reverse home market effect can occur as the fixed trade costs are very low. In addition, the magnitude of the home market effect varies with industry characteristics. Industries with low trade costs, high fixed production costs, low fixed export costs, and high productivity dispersion tend to be more concentrated in large countries. Finally, the negative impact of trade barriers on the home market effect is dampened by the elasticity of substitution which is contrary with the result of the homogeneous firm model. An empirical model is built to test these predictions for developed countries. The empirical results are consistent with the predictions of the theoretical model.

Suggested Citation

  • Ha Nguyen, 2012. "The Home market effect with heterogeneous firms," DEM Discussion Paper Series 12-12, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:12-12
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    References listed on IDEAS

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    Cited by:

    1. Erhardt, Katharina, 2017. "On home market effects and firm heterogeneity," European Economic Review, Elsevier, vol. 98(C), pages 316-340.

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    More about this item

    Keywords

    Home market effect; country size; industry characteristics; heterogeneous firms; firm’s location; market structure;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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