The spatial selection of heterogeneous firms

Journal article: We show that heterogeneous firms choose different locations in response to market integration. Specifically, decreasing trade costs lead to the gradual agglomeration of efficient firms in the larger country where they have access to a bigger pool of consumers. In contrast, high-cost firms seek protection against competition from efficient firms by locating in the smaller country. However, when the spatial separation of markets ceases to be a sufficient protection against foreign competition, high-cost firms choose to set up in the larger market. Hence, the relationship between economic integration and international productivity gap first increases and then decreases with market integration.

Author(s)

Toshihiro Okubo, Pierre Picard, Jacques-François Thisse

Journal
  • Journal of International Economics
Date of publication
  • 2010
Keywords JEL
F12 H22 H87 R12
Keywords
  • Firm heterogeneity
  • Spatial selection
  • Trade liberalization
  • Economic geography
Pages
  • 230-237
Version
  • 1
Volume
  • 82