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

  • Kristian Behrens

    ()

    (CORE, Universit� Catholique de Louvain)

  • Andrea R. Lamorgese

    ()

    (Research Department, Bank of Italy)

  • Gianmarco I.P. Ottaviano

    ()

    (Universit� di Bologna, FEEM and CEPR)

  • Takatoshi Tabuchi

    ()

    (Faculty of Economics, University of Tokyo)

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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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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