Market Size and Geographical Advantage

This paper examines the geographical distribution of firms whithin integrating countries, when regions differ in market sizes and in location with respect to a foreign manufacturing core. We found that geographical proximity of a poor region to the core allows the latter's manufacturing industry to expand when trade costs are very low. However, at intermediate trade costs, regional market size is a stronger determinant of the location of industries. Firms are less likely to locate in small regions close to larger cores than in large peripheral regions. Proximity may expose local industries to increased competition from imports and lead firms to leave the region. Regional policies which finance infrastructure in a small region and increases its accessability can thus be detrimental to local industries without a strong local consumer market. The distribution of welfare gains from trade varies according to consumers' geographical location. Consumers located in a poor region but close to a manufacturing core may experience higher welfare gains than consumers located in the peripheral region.