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Trade Liberalisation and Agglomeration with Firm Heterogeneity - Forward and Backward Linkages

This paper studies the impact of trade costs reduction on geographical concentration in the presence of firm heterogeneity and overhead type of export fixed costs. Firm heterogeneity with the export fixed costs hampers full agglomeration through weakening the forward and backward linkages and fortifying the market crowding effect. Rather than catastrophic agglomeration that the standard new economic geography models have long suggested, trade liberalisation causes gradual agglomeration. Also, trade liberalisation never produces a perfect convergence in welfare for the periphery, which loses, and the core, which gains. Even free trade never equalises the welfare between core and periphery, i.e. trade liberalisation does not eliminate inequality among nations.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 17-2006.

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Length: 30 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:gii:giihei:heiwp16-2006
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  1. Helpman, Elhanan & Melitz, Marc J & Yeaple, Stephen R, 2003. "Export versus FDI," CEPR Discussion Papers 3741, C.E.P.R. Discussion Papers.
  2. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  3. Baldwin, Richard & Okubo, Toshihiro, 2006. "Agglomeration, Offshoring and Heterogenous Firms," CEPR Discussion Papers 5663, C.E.P.R. Discussion Papers.
  4. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
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  6. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," NBER Working Papers 11393, National Bureau of Economic Research, Inc.
  7. Andrew Bernard & Stephen Redding & Peter Schott, 2004. "Comparative advantage and heterogeneous firms," IFS Working Papers W04/24, Institute for Fiscal Studies.
  8. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  9. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  10. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
  11. Facundo Albornoz and Gregory Corcos, 2005. "Subsidy Competition in Integrating Economies," Discussion Papers 05-14, Department of Economics, University of Birmingham.
  12. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  13. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc.
  14. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
  15. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
  16. Bee Yan Aw & Sukkyun Chung & Mark J. Roberts, 1998. "Productivity and the Decision to Export: Micro Evidence from Taiwan and South Korea," NBER Working Papers 6558, National Bureau of Economic Research, Inc.
  17. Toshihiro Okubo & Vincent Rebeyrol, 2006. "Home Market Effect and Regulation Costs - Homogeneous Firm and Heterogeneous Firm Trade Models," IHEID Working Papers 02-2006, Economics Section, The Graduate Institute of International Studies.
  18. Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661314, June.
  19. K.H. Midelfart & H.G. Overman & S.J. Redding & A.J. Venables, 2000. "The location of European industry," European Economy - Economic Papers 142, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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