The effects of globalization on regional inequality in a model of semi-endogenous growth and footloose capital^*

^*Accepted during 2014 APJAE Symposium in Kokura, Japan, Taipei office.

Abstract

We show that manufacturing firms tend to locate only in northern regions when transportation costs are not high, and in both northern and southern regions when transportation costs are high. We made this determination through the use of a semi-endogenous research and development growth model that reflects international trade, footloose capital, and local knowledge spillover. Regional income inequality—defined here as differences in per-capita expenditure relative to the price index—decreases in the former scenario following globalization, as the northern share of expenditure does not change. This lack of change stems from there being a constant and exogenous growth rate. Additionally, the northern price index does not change, even as the southern price index decreases.

Keywords:

• trade integration
• footloose capital
• R&D growth
• scale effects
• regional inequality
• local spillovers
• full agglomeration

Acknowledgements

I would like to thank David Brown, Parello Carmelo, David Denslow, Tatsuo Hatta, Kazumichi Iwasa, Antonio Minniti, Kazuo Mino, Tamotsu Nakamura, Noritsugu Nakanishi, and Takahiro Sato. I express special thanks to Takashi Kamihigashi, as my discussion with him motivated the present paper. I am grateful to Keith Maskus for a number of useful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

^* Accepted during 2014 APJAE Symposium in Kokura, Japan, Taipei office.

1. China has opened its doors to international trade and foreign direct investment.

2. See also Raiser (1998) and Gundlach (1997) about convergence in China.

3. See Jones (2005), Dinopoulos and Thompson (1999), and Dinopoulos and Sener (2007) for survey articles about scale effects in the growth literature. See Jones (1995) and Segerstrom (1998) for the semi-endogenous growth model, and Dinopoulos and Thompson (1998) and Howitt (1999) for the fully endogenous growth model.

4. The two countries are the same, except for a larger share of capital in the North.

5. Tanaka and Yamamoto (2013) examine the equilibrium where all manufacturing firms agglomerate in either one or both regions. However, they do not consider the effects of trade liberalization on regional inequality.

6. The northern price index is given by (4); the southern price index is defined as

7. As we see in (22), the Northern share of total expenditure does not depend on the level of iceberg costs.

8. Tanaka and Yamamoto (2013) also investigated an economy that features the full agglomeration of manufacturing firms in one region.