Ebook Knowledge-Capital Meets New Economic Geography
”European nations are less specialized than US regions” (Krugman, 1991a, p. 76). This stylized fact was recently confirmed by the study of Midelfart Knarvik et al. (2000). Although also European agglomeration tends to increase, especially after the ratification of the Maastricht Treaty that facilitates the mobility of production factors between the EU member states (Haaland et al., 1999, Overman et al., 2001), a gap is still left between concentration in Europe and the US. This gap may be explained by multinational activity.
Since the early stages of new trade theory, the consideration of multinationals may be seen as one of the major innovations in the last two decades’ economic research (Helpman, 1984, Helpman and Krugman, 1985, Markusen, 1984). From its beginning, this literature distinguishes firms by the scope of activities carried out: national single plant firms engaging in trade, horizontal (two-plant) multinationals serving both the home and the foreign market locally (Markusen and Venables, 1998, 2000), and vertical multinationals with production only in the low-wage country and headquarters in the high-wage economy (Helpman, 1984). Both the horizontal and vertical model characterize multinationals by intangible assets (knowledge capital). Only in the knowledge-capital model of multinationals and trade, all these types of firms arise endogenously and may co-exist (for an overview see Markusen, 2002), which seems well in line with the stylized facts (Carr et al. 2001, Markusen and Maskus, 2002, Egger and Pfaffermayr, 2004).
Only recently, the links between multinational production and agglomeration came into the limelight of research. Gao (1999) concentrates on vertical multinational enterprises (MNEs), which exploit international/interregional factor cost differences. There are no relative factor endowment differences between the two countries. In order to produce the differentiated good, labor and the manufacturing composite has to be used to produce the headquarter services.
The manufacturing output is furthermore used for consumption and plant set-up. He finds that agglomeration may break down with economic integration (i.e., a reduction in trade costs) or economic growth. There is no agglomeration at very low transport costs, because unskilled labor-cost differentials become more important than the agglomeration forces in shaping production structure. Concerning the introduction of vertical MNEs, he concludes that they speed up the spreading of industries and thus the process of industrialization of the periphery.
Raybaudi-Massilia (2000) concentrates on specific constellations of one and two plant firms. She introduces two factors, a specific one, land, and a mobile one, labor. Firms may defect from their location choice by setting up an additional plant, closing one of the two plants, or moving a plant from one region to the other. As a result, the evolution of MNEs makes agglomeration of production in only a single country/region less likely.
Ekholm and Forslid (2001) look at vertical and horizontal MNEs separately and confirm Raybaudi-Massilia’s (2000) finding that rising trade costs and the associated surge of horizontal MNEs lead to less agglomeration, and find that with vertical MNEs agglomeration of headquarters becomes more likely. They introduce footloose multi-region firms which are not headquartered in a specific country. This strong assumption leads to a unique symmetric equilibrium. A reallocation of unskilled labor forces firms in the receiving region to produce at a higher scale and, therefore, at lower prices. Furthermore, the smaller region engages proportionally more in headquarter services, as fixed costs are equally borne by both regions. Accordingly, real (unskilled) labor rewards are lower in the larger region.
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