Working Paper: CEPR ID: DP3129
Authors: Rikard Forslid; Karen Helene Midelfart Knarvik
Abstract: This Paper analyses industrial policy in a high wage open economy hosting an agglomeration consisting of vertically linked upstream and downstream firms. We show that optimal policy towards upstream industries typically differ from the optimal policy towards downstream industries. Internationalization impacts on the costs as well as on the benefits related to sustaining an industrial agglomeration. Whether maintaining the agglomeration is compatible with a welfare maximizing policy is shown to depend on level of economic integration.
Keywords: Economic Geography; Globalization; Industrial Clusters; Industrial Policy
JEL Codes: F12; F15; F20; H20; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | location decisions of firms (R30) |
| firm mobility (L10) | government intervention decisions (D70) |
| higher trade costs (F12) | preference for maintaining agglomeration (R32) |
| lower trade costs (F19) | incentivize firms to relocate (F23) |
| gap between factor prices (F16) | government intervention decisions (D70) |
| more rents to foreigners (F29) | less inclination to subsidize cluster (H29) |
| closed economy (P19) | optimal government intervention through subsidies (H21) |
| open economy (F41) | government may levy taxes on downstream sector (H29) |
| pecuniary externalities and market failures (D62) | shift in policy (O24) |