research@hec - Issue #15 - (Page IV)
Ai-Ting Goh joined HEC Paris in 2002 and is a professor of economics as well as co-director of the school’s master’s degree in economics program. She holds a PhD from the University of Pennsylvania (1996) and previously taught at the National University of Singapore and the Catholic University of Louvain. Tomasz Michalski is also an economics professor at HEC Paris. He holds a PhD in economics from Columbia University, New York.
In recent years, the work of 2008 Nobel Prize winning economist Paul Krugman on increasing returns to scale and monopolistic competition (the new theories of international trade) has inspired many economists to increasingly focus on the economic effects of trade liberalization. In particular, they are interested in finding out how free trade influences companies’ location choices. Ai-Ting Goh and Tomaz Michalski have asked the following question. Will opened markets cause industrial companies in small countries to delocalize? To respond, they have developed a brand new model, the first ever to take intermediate goods into account.
MAYBE SIZE REALLY DOES MATTER! Using a two-country model, recent theories on international trade show that for reasons of economies of scale, industrial companies should establish production activities in the larger of the two countries to limit transportation costs. Small countries are consequently likely to specialize in the production of primary goods and to therefore end up deindustrializing. This phenomenon is known as the “home market effect”, yet it only proves accurate when transportation costs for primary goods are significantly lower than those for secondary goods. Economist Donald Davis* points out that he has never seen this theory translate into reality. Does this mean that small countries have no reason to fear deindustrialization? Not necessarily, say Goh
Small Countries and Risks of Deindustrialization
Should small countries that have opened their markets worry about deindustrialization? Sometimes, yes. However, according to HEC economists Ai-Ting Goh and Tomaz Michalski, this risk can be kept to a minimum. They advise then be exported to meet the needs of secondary industry. small countries to specialize in the production of intermediate goods that can
and Michalski. They have introduced the notion of intermediate goods to show that under certain conditions, small countries are, in fact, likely to deindustrialize.
INTERMEDIATE GOODS Goh and Michalski have created an economic model where two types of intermediate goods are both used to manufacturer secondary goods and products in one of two countries (re: the theory of comparative advantage). They show that in this context, two opposing forces come into play. On one hand, secondary good manufacturers want to set up in the larger country to gain access to this market while also limiting shipping costs. On the other, the larger country needs more intermediate goods to supply its industry, so it must import from the smaller country.
The theory of comparative advantage
Formally defined in 1817 by David Ricardo in On the Principles of Political Economy and Taxation, the theory of comparative advantage shows that in a free trade context, countries that specialize in the area of production where they are the most effective (or the least weak) increase their nation’s wealth more than others.
Table of Contents for the Digital Edition of research@hec - Issue #15
Cover & Contents
- Understanding Categorisation as a Guide toMarketing Strategy
- Small Countries and Risks of Deindustrialization
- Teams: How to Develop Feelings of Safety and Social Ties
- “HEC-Dow Jones Private Equity Fitness Ranking™”
research@hec - Issue #15