Globalization, Regional Productivity, Taste Bias and Internal Spatial Distribution

Abstract

I consider an integrated model consisting of a system of two symmetric regions and the rest of the world that features 1 ) globalization, 2 ) regional heterogeneity in productivity , and 3 ) taste bias over domestic and foreign goods as key determinants of spatial agglomeration. I show that falling external trade barriers favor internal agglomeration. Moreover, a reduction in relative productivity compensates for the trade barriers between the two symmetric regions and the rest of the world; this also favors internal agglomeration of the mobile factor. In addition, I consider two cases of taste bias namely ethnocentrism and xenocentrism. I find that a shift of consumer preferences in the two symmetric regions with respect to goods that are made in the rest of the world results in internal agglomeration, too. Finally, a shift of consumer preferences in a region with respect to goods that are made in the other region results 1 ) in internal agglomeration under ethnocentrism, and 2) in internal dispersion under xenocentrism.