Regional integration and the other determinants of North-South ...

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ln 1 1 ln 1 ln 1 ∑ ln ∑ ∑ represents industry’s fixed effects (such as the market power). (3.11) In the model, different forces are governing the location of firms. Transport costs imply that firms buy a large amount of intermediate goods on the domestic and closer market. Then, when more capital is allocated in the country c, rises. If more varieties are produced in c, the production costs reduce ( in this country and raise country’s c profit. In addition, spatial distribution of expenditure 33 ∑ and supply access ∑ , affects the spatial distribution of firms. In the presence of trade barriers, firms are incited to locate in the largest market. The model also includes two dispersion forces. When more firms settled in c, market share decreases for existing firms and hence, the profit in this country falls (local competition effect, . Finally, the profit also depends on countries’ labour costs (1 1 ln 1 ln). 4. The empirical estimations Our theoretical equation (3.11) considers that the share of the industry i in c at time t ) depends on three main variables: labour costs (, supply access (SA) and market access (MA). Their impacts are related to the level of transport costs. Although we mainly focus on those variables, other explanatory variables have to be considered. We thus include , a vector of control variables. (4.1) The literature on economic geography has also underlined that effects of both supplier and market accesses on industrial location depend on the level of transport costs. Before analyzing the determinants of the geographic distribution of industries in the euro- Mediterranean area, we seek to quantify the gradual process of economic integration between the countries belonging to this area. 4.1 Trade costs The evolution of trade costs and asymmetry in market accesses caused by differences in the structures of tariffs and other non tariff barriers is becoming a growing concern in integrated zones. Economic theories suggest that when a preferential trade agreement (PTA) is created, firms from outside the region are motivated to move their production to the integrated bloc because of the advantages of preferential market access. The effect may however not be uniform across integrated countries and depends on the level of trade costs between countries. Puga and Venables (1997) and Baldwin et al. (2003) show that firms tend to concentrate in the country that has the better access to the other countries’ markets. For Chen (2008), at the first stage of the integration, countries that are integrated with a larger number of countries or countries with a larger market size are more likely to experience an 33 The so-called market and supply accesses. 12
increase in firm localisation. As it becomes less costly to export within the integrated region, firms can then have a greater incentive to concentrate their production in the country with lower production costs. In addition, when countries belong to several PTAs, they can constitute a hub and export to all spokes at a low tariff (Chen, 2008). Following this idea, Altomonte (2007) shows the importance of promoting integration between all countries belonging to the area and not only between small countries and the largest market. Because of the importance of trade costs in economic geography, a growing literature is aimed at measuring and understanding them. Within the euro-Mediterranean area, trade barriers between countries may be significant (especially between South/South countries). They may be the result of physical transport costs, political dissension or imperfect trade integration 34 . However, high quality data on direct measures of policy barriers are poor and incomplete especially with regard to non-tariff barriers to trade. Given these problems, following many authors, we use an indirect measure of market access based on the theory of gravity. The border effect approach, initiated by McCallum (1995), has been recently completed by theoretical foundations (Deardorff (2001), Anderson and van Wincoop, (2003)). This approach permits us to account for the fact that internal demand is largely met by domestic producers (Mayer and Zignago, 2005) 35 . In addition, the border effect approach captures all the trade impediments related to the existence of national borders 36 . Following this recent literature, we propose to infer the trade costs in the euro-Mediterranean area from an economic model linking trade flows to observable variables and unobservable trade costs. As Head and Mayer (2004), Chen (2004) and Altomonte (2007), we use information from international trade flows to calculate a proxy for transport costs. Redding and Venables (2004) and Head and Mayer (2004) show that the demand function (equ. 3.6) can be reinterpreted as the volume of sales per firm in each location. Expressing these in aggregate value gives exports from c to l: (4.2) ln ln ln ln (4.3) Bilateral trade flows ( depend on the importers’ “capacity market” which reflect the countries’ masses and consumers price indexes. Bilateral trade flows are also related to the product of the number of firms and their price competitiveness . The countries’ masses can be proxied by countries’ GDPs ( and . Price indexes capture the magnitude of average trade barriers faced by the country l. Both price indexes and price competitiveness are related to the unobserved country-specific heterogeneity, the so-called “multilateral resistance” (Anderson and van Wincoop, 2003). Following Head and Mayer (2004) and Altomonte (2007), we have included country fixed- 34 Even if the integration is incomplete in the period studied, countries already have trade relations with each others. 35 The border effect methodology consists in comparing the relative volumes of intra and international trade for two countries. 36 By using a bilateral trade equation derived from a theoretical model, some authors show how taking the theory seriously can provide a much more useful interpretation (Anderson and van Wincoop, 2003, Head and Mayer, 2004). 13
Page 1 and 2: Regional integration and the other
Page 3 and 4: the relevant determinants of indust
Page 5 and 6: In this section, the attention shif
Page 7 and 8: all the countries is the same as th
Page 9 and 10: The dependent variables are the nat
Page 11: The profit of a single firm in c is
Page 15 and 16: produces the most efficient and the
Page 17 and 18: Mediterranean area. We pay particul
Page 19 and 20: ln / ∑ exp (4.18) The acce
Page 21 and 22: associated with a higher sensitivit
Page 23 and 24: Appendix : Data description Country
Page 25 and 26: Brülhart, M., Traeger, R., 2005. A
Page 27 and 28: Heston, A., Summers, R., Aten, B.,
Page 29 and 30: Sanguinetti, P., Traistaru, I., Mar
Page 31 and 32: Table 2.3: Concentration indexes by
Page 33 and 34: Notes: (a) *significant at 10%, **
Page 35 and 36: Figure 4.1 30 25 20 15 10 5 0 Notes
Page 37 and 38: Table 4.4: Determinants of industri

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