Should small countries fear deindustrialization?

Tomasz Michalski (1) , Ai-Ting Goh (1)

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

Will small countries deindustrialize when opening up to trade with large countries? Davis (1998) shows that for the home market effect to lead to deindustrialization of small countries, trade costs for homogenous goods must be sufficiently smaller than trade costs in differentiated goods, a condition which is not supported by empirical evidence. We show that if differentiated goods production uses tradeable inputs small countries can become deindustrialized when trading with a sufficiently large

Keywords: home market e¤ect; deindustrialization; trade costs; economic geography; intermediate goods

Domains: Economy and decision science

Tomasz Michalski, Ai-Ting Goh. Should small countries fear deindustrialization?. 2009. ⟨hal-00489273⟩