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On the development strategy of countries of intermediate size -An analysis of heterogenous firms in a multiregion framework

  • Rikard Forslid

    (Stockholm University (Sweden) and CEPR (UK))

  • Toshihiro Okubo

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

This paper compares two policies: trade cost reduction and firm relocation cost reduction using a three-country version of a heterogeneous-firms economic geography model, where the three countries have different market (population) size. We show how the effects of the two policies differ, in particular, for the country of intermediate size. Unless the intermediate country is very small, it will gain industry when relocation costs are reduced, but lose industry when trade costs are reduced. The smallest country loses industry in both cases, but only experiences lower welfare in the case of lower relocation costs. Thus, the ranking of the policies from the point of view of the two small and intermediate countries tends to be the opposite.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2010-36.pdf
File Function: First version, 2010
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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2010-36.

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Length: 27 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:kob:dpaper:dp2010-36
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