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The spatial selection of heterogeneous firms

  • Toshihiro Okubo

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Pierre M. Picard

    (University of Manchester (UK) and CORE, Université catholique de Louvain (Belgium))

  • Jacques-François Thisse

    (CORE, Université catholique de Louvain (Belgium), PSE (France) and CEPR (UK))

The aim of this paper is to study the spatial selection of firms once it is recognized that heterogeneous firms typically choose different locations in respond to market integration of regions having different sizes. Specifically, we show that decreasing trade costs leads to the gradual agglomeration of efficient firms in the large region because these firms are able to survive in a more competitive environment. In contrast, high-cost firms seek protection against competition from the efficient firms by establishing themselves in the small region. However, when the spatial separation of markets ceases to be a sufficient protection against competition from the low-cost firms, high-cost firms also choose to set up in the larger market where they have access to a bigger pool of consumers. This leads to the following prediction: the relationship between economic integration and interregional productivity differences first increases and then decreases with market integration.

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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 229.

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Length: 39 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:kob:dpaper:229
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