DP2976 | The District and the Global Economy: Exporting versus Foreign Location

Publication Date

29/09/2001

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Abstract

This Paper studies the welfare implications of the location decisions of innovative newcomers that, though spinning off an industrial district, may choose whether to locate inside or outside its borders. Even if this choice has always been relevant, globalization has turned the issue, whether to locate inside or outside the district, from an intra- to an inter-national issue. The fear is delocation, that is, the implosion of the district due to the flight of innovative newcomers to distant locations. This negative effect could offset the benefits that the district reaps both in terms of cost reduction through foreign production in low wage countries and in terms of access to new markets. We address these issues by depicting the industrial district as a centre of innovation where positive local spillovers sustain the endogenous invention of new goods by profit-seeking firms. After invention firms face a crucial choice between reaching distant markets by export or plant delocation. By focusing on market-seeking rather than cost-reducing location choices, we argue that, by the very nature of the district, the equilibrium distribution of firms is bound to be inefficient from the point of view of the district as a whole. In particular, firms? attempts to circumvent trade barriers through delocation slow down the pace of innovation and harm the welfare of the district.