IDEAS home Printed from https://ideas.repec.org/p/bdi/wptemi/td_561_05.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Kristian Behrens & Andrea R. Lamorgese & Gianmarco I.P. Ottaviano & Takatoshi Tabuchi, 2005. "Testing the 'home market effect' in a multi-country world: A theory-based approach," Temi di discussione (Economic working papers) 561, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_561_05
    as

    Download full text from publisher

    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2005/2005-0561/tema_561.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. de Sousa, José & Mayer, Thierry & Zignago, Soledad, 2012. "Market access in global and regional trade," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1037-1052.
    2. Patrizio Pagano & Fabiano Schivardi, 2003. "Firm Size Distribution and Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(2), pages 255-274, June.
    3. Donald R. Davis & David E. Weinstein, 1996. "Does Economic Geography Matter for International Specialization?," Harvard Institute of Economic Research Working Papers 1773, Harvard - Institute of Economic Research.
    4. H. Hanson, Gordon, 2005. "Market potential, increasing returns and geographic concentration," Journal of International Economics, Elsevier, vol. 67(1), pages 1-24, September.
    5. Yong-Seok Choi & Pravin Krishna, 2004. "The Factor Content of Bilateral Trade: An Empirical Test," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 887-914, August.
    6. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    7. Davis, Donald R., 1995. "Intra-industry trade: A Heckscher-Ohlin-Ricardo approach," Journal of International Economics, Elsevier, vol. 39(3-4), pages 201-226, November.
    8. Werner Antweiler & Daniel Trefler, 2002. "Increasing Returns and All That: A View from Trade," American Economic Review, American Economic Association, vol. 92(1), pages 93-119, March.
    9. Davis, Donald R. & Weinstein, David E., 2003. "Market access, economic geography and comparative advantage: an empirical test," Journal of International Economics, Elsevier, vol. 59(1), pages 1-23, January.
    10. Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September.
    11. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
    12. Head, Keith & Mayer, Thierry, 2004. "The empirics of agglomeration and trade," Handbook of Regional and Urban Economics,in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 59, pages 2609-2669 Elsevier.
    13. Donald R. Davis & David E. Weinstein, 2001. "An Account of Global Factor Trade," American Economic Review, American Economic Association, vol. 91(5), pages 1423-1453, December.
    14. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    15. David Hummels & James Levinsohn, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 799-836.
    16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    17. Head, Keith & Mayer, Thierry & Ries, John, 2002. "On the Pervasiveness of Home Market Effects," Economica, London School of Economics and Political Science, vol. 69(275), pages 371-390, August.
    18. 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.
    19. Davis, Donald R. & Weinstein, David E., 1999. "Economic geography and regional production structure: An empirical investigation," European Economic Review, Elsevier, vol. 43(2), pages 379-407, February.
    20. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    21. Redding, Stephen & Venables, Anthony J., 2004. "Economic geography and international inequality," Journal of International Economics, Elsevier, vol. 62(1), pages 53-82, January.
    22. Robert C. Feenstra & Gordon H. Hanson, 2004. "Intermediaries in Entrepot Trade: Hong Kong Re-Exports of Chinese Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(1), pages 3-35, March.
    23. Pavitt, Keith, 1984. "Sectoral patterns of technical change: Towards a taxonomy and a theory," Research Policy, Elsevier, vol. 13(6), pages 343-373, December.
    24. Ginsburgh, Victor & Papageorgiou, Yorgo & Thisse, Jacques-Francois, 1985. "On existence and stability of spatial equilibria and steady-states," Regional Science and Urban Economics, Elsevier, vol. 15(2), pages 149-158, June.
    25. Takatoshi Tabuchi & Kristian Behrens & Andrea R. Lamorgese, 2004. "Testing the Home Market Effects in a Multi-country World: The Theory," Econometric Society 2004 Far Eastern Meetings 595, Econometric Society.
    26. Amiti, Mary, 1998. "Inter-industry trade in manufactures: Does country size matter?," Journal of International Economics, Elsevier, vol. 44(2), pages 231-255, April.
    27. Bowen, Harry P & Leamer, Edward E & Sveikauskas, Leo, 1987. "Multicountry, Multifactor Tests of the Factor Abundance Theory," American Economic Review, American Economic Association, vol. 77(5), pages 791-809, December.
    28. Helpman, Elhanan, 1984. "The Factor Content of Foreign Trade," Economic Journal, Royal Economic Society, vol. 94(373), pages 84-94, March.
    29. Jagdish N. Bhagwati, 1982. "Shifting Comparative Advantage, Protectionist Demands, and Policy Response," NBER Chapters,in: Import Competition and Response, pages 151-196 National Bureau of Economic Research, Inc.
    30. Elhanan Helpman, 1998. "Explaining the structure of foreign trade: Where do we stand?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(4), pages 573-589, December.
    31. Federico Trionfetti, 2001. "Using home-biased demand to test trade theories," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 137(3), pages 404-426, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. 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.
    3. 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.
    4. Juan Labraga, 2009. "Política Comercial y Política de Infraestructura en el MERCOSUR," IDB Publications (Working Papers) 9328, Inter-American Development Bank.
    5. Gianluca Cafiso, 2015. "Sectoral trade freeness and agglomeration in the EU: an empirical test approach," Empirical Economics, Springer, vol. 48(2), pages 779-805, March.
    6. Juan Labraga, 2009. "Política Comercial y Política de Infraestructura en el MERCOSUR," IDB Publications (Working Papers) 2545, Inter-American Development Bank.
    7. Suedekum, Jens, 2005. "The Home Market Shadow," IZA Discussion Papers 1462, Institute for the Study of Labor (IZA).
    8. Dao-Zhi Zeng & Toru Kikuchi, 2009. "Home Market Effect And Trade Costs," The Japanese Economic Review, Japanese Economic Association, vol. 60(2), pages 253-270.

    More about this item

    Keywords

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

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_561_05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/bdigvit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.