Market Potential and the Location of Japanese Investment in the European Union

This paper develops a theoretical model of location choice under imperfect competition to formalize the notion that firms prefer to locate where the markets are. The profitability of a location depends on a term that weights demand in all locations by accessibility. Using a sample of Japanese firms' choices of regions within European countries, we compare the theoretically derived measure of market potential with the standard form used by geographers. Our results show that market potential matters for location choice but cannot account entirely for the tendency of firms in the same industry to agglomerate.

[1]  P. Krugman,et al.  A &Apos;Reciprocal Dumping&Apos; Model of International Trade , 1983 .

[2]  Hedley Rees,et al.  Limited-Dependent and Qualitative Variables in Econometrics. , 1985 .

[3]  Anthony J. Venables,et al.  Equilibrium Locations of Vertically Linked Industries , 1996 .

[4]  T. Mayer,et al.  On the Pervasiveness of Home Market Effects , 2002 .

[5]  R. Griffith,et al.  Taxes and the location of production: evidence from a panel of US multinationals , 1998 .

[6]  Daniel McFadden,et al.  Modelling the Choice of Residential Location , 1977 .

[7]  M. Lord,et al.  Regional trade patterns , 1998 .

[8]  Anthony J. Venables,et al.  Economic Geography and International Inequality , 2001 .

[9]  P. Krugman.  Scale Economies, Product Differentiation, and the Pattern of Trade , 1980 .

[10]  Philippe Martin.  Public Policies and Economic Geography , 2003 .

[11]  P. Krugman,et al.  The Spatial Economy , 1999 .

[12]  Daniel A. Gerlowski,et al.  WHAT ATTRACTS FOREIGN MULTINATIONAL CORPORATIONS? EVIDENCE FROM BRANCH PLANT LOCATION IN THE UNITED STATES , 1992 .

[13]  T. Mayer,et al.  Non-Europe: The magnitude and causes of market fragmentation in the EU , 2000 .

[14]  Ruud A. De Mooij,et al.  Taxation and Foreign Direct Investment: A Synthesis of Empirical Research , 2001, SSRN Electronic Journal.

[15]  Lynda Porter.  Taxes and the location of production , 2003 .

[16]  Mike Wright,et al.  Qualitative Choice Analysis-Theory, Econometrics and an Application to Automobile Demand , 1987 .

[17]  H. Wolf,et al.  Intranational Home Bias in Trade , 2000, Review of Economics and Statistics.

[18]  Eric R. Hansen,et al.  Industrial location choice in Sao Paulo, Brazil : A nested logit model , 1987 .

[19]  Keith Head.  Non-Europe : The Magnitude and Causes of Market Fragmentation in Europe , 2000 .

[20]  C. D. Harris.  The, Market as a Factor in the Localization of Industry in the United States , 1954 .

[21]  John Mccallum,et al.  National Borders Matter: Canada-U.S. Regional Trade Patterns , 1995 .

[22]  Gordon H. Hanson.  Market Potential, Increasing Returns, and Geographic Concentration , 1998 .

[23]  A. Dixit,et al.  Monopolistic competition and optimum product diversity , 1977 .

[24]  T. Mayer,et al.  Hierarchical Location Choice and Multinational Firms Strategy: A nested logit model applied to Japanese investment in Europe , 2001 .

[25]  Richard Florida,et al.  Agglomeration and Industrial Location: An Econometric Analysis of Japanese-Affiliated Manufacturing Establishments in Automotive-Related Industries , 1994 .

[26]  James E. Anderson,et al.  Gravity with Gravitas: A Solution to the Border Puzzle , 2001 .

[27]  P. Krugman,et al.  A Dynamic Spatial Model , 1992 .

[28]  T. Mayer,et al.  La localisation à l'étranger des entreprises multinationales. Une approche d'économie géographique hiérarchisée appliquée aux entreprise japonaises en Europe. , 1999 .

[29]  David Hummels,et al.  Toward a Geography of Trade Costs , 1999, GTAP Working Paper.

[30]  A. Venables,et al.  The Spatial Economy: Cities, Regions, and International Trade , 2000 .

[31]  S. Lael Brainard.  A Simple Theory of Multinational Corporations and Trade with a Trade-Off between Proximity and Concentration , 1993 .

[32]  K. Head,et al.  Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of US-C , 2001 .

[33]  P. Krugman.  Increasing Returns and Economic Geography , 1991 .

[34]  Ari Kuncoro,et al.  Industrial Development in Cities , 1992, Journal of Political Economy.

[35]  James E. Anderson,et al.  Trade Costs , 2004 .

[36]  K. Train.  Discrete Choice Methods with Simulation , 2003 .

[37]  David E. Weinstein,et al.  Economic Geography and Regional Production Structure: An Empirical Investigation , 1997 .

[38]  K. Train.  Qualitative Choice Analysis: Theory, Econometrics, and an Application to Automobile Demand , 1985 .

[39]  J. Ries,et al.  Attracting foreign manufacturing: Investment promotion and agglomeration , 1999 .

[40]  Natalie Chen,et al.  Intra-National Versus International Trade in the European Union: Why Do National Borders Matter? , 2002 .

[41]  R. Griffith,et al.  Corporate income tax reforms and international tax competition , 2002 .