Mobile Capital and the Home Market Effect

Abstract

The home market effect (HME) reveals how industrial location depends on country size. One-factor or immobile-labor models are employed in early studies of the HME, in which the transport costs of the homogeneous good are found to be essential. In more recent literature, two-factor models, with the addition of mobile capital, are also used. This paper compares these models and obtains the following results. First, mobile capital brings the existence of the HME for any transport costs of the homogeneous good. In addition, in a two-factor model, a larger share of capital may result in a smaller firm share, and firms may relocate to a smaller country when the homogeneous good market is more integrated.