Intra-National Regional Heterogeneity in International Trade: Foreign Growth on Exports and Production of Domestic Regions
International trade can induce changes in production structure across domestic regions as well as across industries. While the literature is well established on the latter issue, the former issue has been examined less. We present a two-country model with explicit incorporation of two regions in a home country and one region in a foreign country. Skilled workers, freely mobile across domestic regions, are required to set up a firm, and one region is located closer to a foreign country. Our theoretical model suggests that effects of foreign growth on production are asymmetric among regions while causing positive effects on the exports of all regions. We empirically test our theoretical hypothesis with production and export datasets of Japanese regions. Our empirical results provide strong evidence in support of a positive growth effect of a foreign market on regional exports and capture asymmetric effects of foreign growth on the production of domestic regions.
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