Firms' Spatial Sorting and Market Access

Abstract

Using a model with heterogeneous firms, that consists of a system of two integrated regions (a large core region and a small periphery region) and an external third region, I study the impact of external trade openness on firms' spatial sorting patterns within the system of the two regions. Applying the main theoretical findings of this model in the case of Brexit, I find that impaired access to and from the UK induces less manufacturing firms to relocate from the periphery to the core of the EU. Other findings show that as the external region becomes more important relative to the system of the two integrated regions (i.e. its productivity goes up or/and its market size goes up), the most efficient manufacturing firms find it profitable to leave the small periphery region and migrate to the large core region.

Keywords:

• Spatial sorting
• market access
• firm heterogeneity
• regional heterogeneity

JEL CLASSIFICATIONS:

• R12
• F12
• F20

Acknowledgments

I would like to thank Nikolaos Ziros, William Addessi and the two anonymous referees for their comments.

Disclosure statement

No potential conflict of interest was reported by the author.

ORCID

Dionysios Karavidas http://orcid.org/0000-0003-3349-6834

Notes

1 The bigger can be considered as the core of the EU and the smaller as the periphery.

2 As in the work of Baldwin and Okubo (2006), our basic model presented in Section 2 can be used to discuss the impact of regional policy. For example, if Southern local government subsidizes to reduce the transportation costs between South and Foreign country, the results would be biased in favor of South region. In this case, South has a location advantage, and intuitively this would induce some manufacturing firms to move from North to South. However, addressing this task is beyond the purview of this paper.

3 Free capital mobility is one of the key elements in the EU market. Uncertainty over future trade arrangement between the UK and the EU will tend to dampen FDI (Dhingra et al., 2017). The UK could lose the ability to participate in the free movement of capital in the EU. As a result, in terms of economic integration, a Brexit will affect free movement of capital including FDI (Busch & Matthes, 2016). Therefore, for simplicity the size and the composition of Foreign country is assumed to be fully exogenous. The assumption of free international mobility changes the structure and the features of the present model. Instead of being a model with two integrated regions and one external country, it will be a model with three integrated regions. In this case, the results will be different and the spatial sorting patterns across these three regions will be affected by several parameters, including trade barriers, market sizes and differences in the distribution function of the marginal costs of manufacturing sector.

4 $d({\int }_0^{{\alpha }_R}{\alpha }^{1-\sigma }f(\alpha {)}_u\mathrm{d}a)/\mathrm{d}{\alpha }_R={\gamma }_u{\alpha }_R>0$.

5 $d({\int }_{{\alpha }_R}^1{\alpha }^{1-\sigma }f(\alpha {)}_u\mathrm{d}a)/\mathrm{d}{\alpha }_R=-{\gamma }_u{\alpha }_R<0$.

Additional information

Notes on contributors

Dionysios Karavidas

Dionysios Karavidas (PhD) finished his basic studies in Economics at the University of Cyprus. Then, he obtained a Master degree in Economic Analysis by the Universidad Carlos 3 de Madrid. In 2017, he finished his PhD in Quantitative Economics at the University of Kiel, focusing on the New Economic Geography and International Trade. He has been employed as a Post Doctoral researcher in the Kemmy Business School, at the university of Limerick since 2018, where he has taught several courses in Risk Analytics, Big Data and Economics. At the same time, he is part of the COFFERS-Horizon 2020 project and conducts research on the fields of taxation, governance and regulation.