ENTREPRENEURS' LOCATION CHOICE AND PUBLIC POLICIES: A SURVEY OF THE NEW ECONOMIC GEOGRAPHY

Abstract The aim of this paper is to survey what has been done by the New Economic Geography (NEG) on a regional scale in order to answer the three following questions: What are the predictions of the NEG concerning the future of regions in the triad? Are these predictions robust? What can be the optimal public policy on a regional and national scale in a world characterized by agglomeration, trade liberalization and mobility of entrepreneurs? In surveying the most recent contributions in this area, the paper sheds light on several shortcomings of the NEG literature in order to point out new directions for further research, with particular reference to studies concerning welfare and tax competition.     

Transport costs, intermediate goods, and localized growth

This paper presents a dynamic, two-regional, general equilibrium model in which interregional production and trade patterns are endogenously determined. Localized growth stems from the geographical concentration of an industrial sector exhibiting permanent productivity increases. Geographical concentration is a result of the interaction between local market size and local competition in the differentiated input industry. Regional factor endowment with an immobile factor is decisive for the long-run specialization, trade and growth patterns between the regions if large endowment differences prevail. With equal-sized regions, multiple equilibria exist. Furthermore, we argue that integration might lead to increasing regional concentration of production and innovation.     

创新空间扩散、集聚租金与经济高质量发展

基于新经济地理学和内生增长理论,构建了一个贸易自由度约束下的局域溢出模型,探究了创新的空间扩散与集聚影响经济高质量发展的作用机制。研究发现：对称均衡是模型的唯一内点均衡;当角点均衡时,存在唯一的贸易自由度支撑区间,此时,如果运输成本变小,则技能劳动力、R&D部门、制造业部门以及创新活动将变得更集聚,同时创新的空间扩散程度变大,外围区域在研发创新方面的劣势减弱;从增长和福利评价的角度看,在技能劳动力存量不变的条件下,创新的空间扩散对整个经济体的经济增长并没有影响,然而,当区域的经济增长源于可流动的技能劳动力集聚时,中心区域的技能劳动力和普通劳动力总是偏好集聚状态,当且仅当创新的空间扩散效应足够大或者集聚租金较小时,外围区域的普通劳动力偏好集聚状态。因此,降低运输成本,提高贸易自由度,有助于增大创新空间扩散效应,减小集聚租金,提高全域劳动力福利水平,从而促进经济的高质量发展。     

Which Has Stronger Impacts on Regional Segregation: Industrial Agglomeration or Ethnolinguistic Clustering?

Abstract

We investigate how regional segregation patterns are affected by industrial agglomeration and ethnic clustering, by adding the externality of ethnicity to the model of agglomeration and trade proposed by Ottaviano et al. (2002. Agglomeration and trade revisited, International Economic Review, 43, 409–436). We show that ethnic segregation patterns are persistent, while ethnic mixing distribution appears only when trade costs are intermediate and ethnicity clustering preferences are less intense. Further, discrepancies of the social optimum and equilibrium are caused because the social optimum is less sensitive to a change in trade costs, when the population of farmers (immobile factors affecting ethnicity utilities) is sufficiently large.     

Tax Competition with Heterogeneous Firms

Abstract

This paper studies tax competition in an economic geography model that allows for agglomeration economies with trade costs and heterogeneous firms. We find that the Nash equilibrium involves a large country charging a higher tax than a small nation. Lower trade costs lead to an intensification of competition, a drop in Nash tax rates and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax differences in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of big and small nations' industries; by lowering tax rates, a small nation can attract high-productivity firms.     

Trade liberalisation and agglomeration with firm heterogeneity: Forward and backward linkages

This paper studies the impact of trade cost reductions on the geographical concentration of manufacturing in the presence of intermediate input linkages, firm heterogeneity and fixed export costs. The presence of non-exporting firms in this Melitz-like model hampers full agglomeration by weakening the forward and backward linkages and fortifying market-crowding effect. Gradual trade liberalisation causes gradual agglomeration rather than the catastrophic agglomeration that economic geography models have long suggested. Also, trade liberalisation produces divergent welfare effects with the periphery losing and the core gaining; even costless trade fails to equalise welfare in the core and periphery due to non-exported intermediate inputs.     

Trade costs,regional inequality,and the Home-Market Effect

ABSTRACT

This paper develops an economic geography framework with positive trade costs in both manufacturing and traditional sectors, mobile skilled workers, and unequal shares of unskilled labour in regions. It shows that partial agglomeration always features the Home-Market Effect (HME) regardless of whether regions trade only the manufacturing good or both. Moreover, spatial factor mobility is significant for the HME to arise, while intersectoral mobility does not play a crucial role. Furthermore, a decrease in the traditional sector trade costs makes the HME weaker and increases the likelihood of full agglomeration in the larger region. Finally, the paper shows that a small departure from Cobb–Douglas upper-tier utility towards gross substitutability of manufacturing and traditional goods reinforces the HME, while the opposite holds for gross complementarity of goods.     

Chamberlinian Spatial Computable General Equilibrium Modelling: A Theoretical Framework

In this paper, a multi-regional multi-sectoral computable general equilibrium model is developed by bringing together different strands of theoretical reasoning. These are as follows: input–output analysis, gravity modelling, the theory of intra-industry trade and the theory of general equilibrium under conditions of monopolistic competition. The innovation in this approach is the assumption that, within each sector, a large number of different brands of output are produced. Households like diversity of consumption and diversity of inputs is a productive factor for firms. The number of brands produced in each sector and region is endogenous. A certain amount of fixed costs per brand imposes an upper bound on the number of available brands. Factor markets are perfectly competitive, while monopolistic competition prevails on goods markets. The equilibrium solution of the model closely resembles models which have been applied on an ad hoc basis in regional science before, but it is well founded in modern economic theory now. In particular, trade flows obey a gravity law in equilibrium.     

A monopolistic-competition model of international trade with external economies of scale

This paper presents a two-country model of monopolistic competition in which differentiated products are produced subject to external economies of scale and two countries differ only in size measured by the factor endowment. It is shown that under free trade, the larger country has positive net exports of differentiated products, which leads to its gains from trade, while the smaller country may lose from trade. Noteworthy is that the industrial agglomeration induced by inter-industry trade is possibly harmful to both countries if the two countries are similar in size and the taste for product diversity is sufficiently strong.     

Heckscher–Ohlin and agglomeration

We argue that embedding endowment-based comparative advantage within a standard NEG framework helps solve the indeterminacy due to multiple equilibria and the ambiguity concerning the relation between integration and specialisation (monotonicity versus non-monotonicity) typical of the NEG literature. In particular, we show that if endowments are in the FPE set, the process of trade integration involves an overshooting of international specialisation and relative factor prices with respect to the free trade level determined by factor abundance. In contrast, if endowments are outside the FPE set, then, even in the presence of agglomeration forces, specialisation and factor prices are monotonically related to trade costs, as implied by the standard trade theory. We argue that the model can shed light on some puzzling stylised facts.     

A regional model of endogenous growth without scale assumptions

In this paper we model growth using a scale-neutral approach to innovation allowing differences between regions to emerge due to regional mechanisms. In this model, agglomeration is growth enhancing as the scale effect for innovation arises from greater access to knowledge rather than any assumed scale effects in growth-modelling techniques. Furthermore, entrepreneurs are assumed to choose the location of firms endogenously so as to minimize the costs of innovation, transport and living. The effects of such mechanisms are such that any policies that increase knowledge spillovers between locations will enhance growth and equality, but may be destabilizing for agglomeration.     

Redistribution and regional development under tax competition

This paper considers how capital tax competition affects transfer and development policies in the presence of regional income disparity. In each country, development policies determine the number of rich (poor) regions that (do not) engage in production activities, while transfer policies redistribute income between rich and poor regions. The mix of transfer and development policies is inefficient under tax competition: conditional on the equilibrium tax rate, too much revenue is spent on development policies and too little on transfer policies. This analysis of the expenditure mix implies that development policies are used as a means of regional redistribution even if transfer policies are efficient instruments for this purpose. Moreover, it is shown that the overall level of public expenditure may be too high because of the possibility of over-development.     

Integration, agglomeration and welfare

This paper studies the social desirability of agglomeration, and the efficiency arguments for policy intervention in a simple, analytically tractable new economic geography model. The location pattern emerging as market equilibrium is ‘bubble-shaped’, i.e. it features dispersion both at high and low trade costs and stable equilibria with partial and full agglomeration for intermediate levels of trade costs. We show that the market equilibrium is characterized by over-agglomeration for high trade costs and under-agglomeration for low trade costs, and we work out analytically that a net pecuniary externality is the underlying cause of this market failure. One particularly noteworthy result is that the net pecuniary externality is positive at high levels of trade freeness. However, there is no market under-agglomeration unless this positive net pecuniary externality interacts with an additional congestion force originating in the (per se efficient) competitive housing market.     

Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy

This paper explores the implications of the interaction between interregional tax competition and intraregional political competition for the optimal provision of public goods under representative democracy à la (Osborne and Slivinski, 1996) and (Besley and Coate, 1997). As an extension of Hoyt’s (1991) finding that intensified tax competition is always harmful and aggravates the extent to which public goods are undersupplied in a region, we show that intensified tax competition can be beneficial if political as well as tax competition is considered. In particular, we identify plausible conditions under which (i) there is an optimal intensity of tax competition such that the interaction between interregional tax competition and intraregional political competition will result in the optimal provision of public goods and (ii) intensified tax competition will be beneficial if and only if the degree of tax competition is less than this optimal intensity.     

Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy

This paper explores the implications of the interaction between interregional tax competition and intraregional political competition for the optimal provision of public goods under representative democracy à la Osborne and Slivinski, 1996, Besley and Coate, 1997. As an extension of Hoyt’s (1991) finding that intensified tax competition is always harmful and aggravates the extent to which public goods are undersupplied in a region, we show that intensified tax competition can be beneficial if political as well as tax competition is considered. In particular, we identify plausible conditions under which (i) there is an optimal intensity of tax competition such that the interaction between interregional tax competition and intraregional political competition will result in the optimal provision of public goods and (ii) intensified tax competition will be beneficial if and only if the degree of tax competition is less than this optimal intensity.     

A world trade model with bilateral trade based on comparative advantage

This paper describes an extension of Duchin's world trade model to include the explicit representation of transportation costs, permitting the endogenous determination of bilateral trade flows and region-specific prices. The original model is a linear program that, based on comparative advantage and the minimization of factor use, determines regional production and trade flows as well as world prices and scarcity rents for m regions, n good, and k factors. The new world trade model with bilateral trade achieves its objectives by introducing transportation services and geographically dependent transportation requirements for each traded good and each pair of potential trade partners. The formulation of this model and its major properties are presented, and results from a preliminary analysis with 11 regions, eight goods, four transportation sectors, and six factors of production are reported and compared with corresponding results from the world trade model. On the basis of this comparison, we conclude that transportation costs have little impact on a region's total imports or exports of a given commodity.     

External spillovers, internal spillovers and the geography of production and innovation

We consider a three-location duopoly model such that (i) firms choose production and innovation locations before (Bertrand) competition takes place and (ii) there are internal and external knowledge spillovers. We show: (1) agglomerations where firms earn negative profits may exist when there are both external and internal knowledge spillovers; (2) greater external spillovers do not necessarily favor agglomeration; (3) decreasing communication costs tend to favor agglomeration; (4) there are exactly two types of agglomeration equilibria: either both firms innovate in the agglomeration, or there is an innovator and an imitator; and (5) if there is a location where both firms produce, then innovation must take place in this location.     

International automotive production networks: how the web comes together

This paper aims to provide empirical evidence for the connections between new trade theory and the spatial distribution of economic activities, considering the results obtained by the literature on New Economic Geography as a starting point. To do this, we apply Social Network Analysis specifically to the World Automotive Trade Network. We explore the structural features of the auto network for the years 1996 and 2009 using data on trade flows for 172 countries. Our findings suggest that the auto network has become denser, more extensive and more integrated over time, depicting a center-periphery structure in which regional clusters play a prominent role. In this configuration, strong agglomeration forces generated by companies’ desire for large and rich market access with minimum transportation costs are balanced by the search for new high-potential markets.     

How do interregional spillovers influence the distribution of technology? The case of Chinese manufacturing

The Chinese economy displays considerable inequality across regions. In this paper, we analyzed the distribution of intermediate input shares in China. We use regional input–output tables from 2007 and find that regions with higher GDP per capita generally had higher input shares, regardless of sector. Then, using intermediate input shares as a proxy of technology, we analyzed the pattern of regional technology distributions across manufacturing sectors as well as the extent of interregional technology spillovers. Our results indicate that interregional backward spillovers have significantly positive impacts on the shape of the technology distributions in eastern (coastal) regions. By contrast, the vertical spillovers of the central and western regions are largely dominated by intra-regional forward effects. Our results suggest that the shift of Chinese manufacturing from coastal to inland regions with lower production costs cannot reduce the imbalance among regions unless the technology gap is narrowed.