Globalization and the spatial concentration of production

Abstract

New trade theory models predict that freer trade increases the spatial concentration of industrial production across countries. While nations with large home markets and central geographical location become increasingly attractive business locations, small peripheral countries gradually deindustrialize. Using data for 26 industries, 20 OECD countries and 20 years, we investigate the empirical validity of this claim. Separating out the role of home market size from geographical factors, and using various panel methods, we find robust evidence in line with theory. Freer trade has indeed magnified the importance of domestic demand and geographical location for the pattern of industrial production across the globeand has therefore exacerbated spatial disparities.