The proximity-concentration trade-off with asymmetric countries

In a model with two countries of different size, we examine the effects of a fall in trade costs on firms' location, on their number of plants, on their production and on regional production and welfare. The possibility to run several plants reduces the strength of the home market effect. Regional production and welfare may move non-monotonically with trade costs. We extend the model to endogenize country sizes. We show that there exists a continuum of equilibria with multinational firms and that a rent can be taxed by governments. We precisely identify how different parameters affect the results. © 2011 The Author. The Manchester School © 2011 Blackwell Publishing Ltd and The University of Manchester.