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The Home market effect with heterogeneous firms


  • Ha Nguyen

    () (CREA, University of Luxembourg)


This paper examines the home market effect in the framework of heterogeneous firms. The paper finds that not only trade costs but also fixed trade costs cause the home market effect and the reverse home market effect can occur as the fixed trade costs are very low. In addition, the magnitude of the home market effect varies with industry characteristics. Industries with low trade costs, high fixed production costs, low fixed export costs, and high productivity dispersion tend to be more concentrated in large countries. Finally, the negative impact of trade barriers on the home market effect is dampened by the elasticity of substitution which is contrary with the result of the homogeneous firm model. An empirical model is built to test these predictions for developed countries. The empirical results are consistent with the predictions of the theoretical model.

Suggested Citation

  • Ha Nguyen, 2012. "The Home market effect with heterogeneous firms," CREA Discussion Paper Series 12-12, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:12-12

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    References listed on IDEAS

    1. Holmes, Thomas J. & Stevens, John J., 2005. "Does home market size matter for the pattern of trade?," Journal of International Economics, Elsevier, vol. 65(2), pages 489-505, March.
    2. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
    3. Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September.
    4. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    5. 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.
    6. Davis, Donald R. & Weinstein, David E., 1999. "Economic geography and regional production structure: An empirical investigation," European Economic Review, Elsevier, vol. 43(2), pages 379-407, February.
    7. Robert Feenstra & Hiau Looi Kee, 2004. "On the Measurement of Product Variety in Trade," American Economic Review, American Economic Association, vol. 94(2), pages 145-149, May.
    8. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    9. Feenstra, Robert C. & Madani, Dorsati & Yang, Tzu-Han & Liang, Chi-Yuan, 1999. "Testing endogenous growth in South Korea and Taiwan," Journal of Development Economics, Elsevier, vol. 60(2), pages 317-341, December.
    10. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-544, September.
    11. Feenstra, Robert & Kee, Hiau Looi, 2008. "Export variety and country productivity: Estimating the monopolistic competition model with endogenous productivity," Journal of International Economics, Elsevier, vol. 74(2), pages 500-518, March.
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    1. repec:eee:eecrev:v:98:y:2017:i:c:p:316-340 is not listed on IDEAS

    More about this item


    Home market effect; country size; industry characteristics; heterogeneous firms; firm’s location; market structure;

    JEL classification:

    • F1 - International Economics - - Trade
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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