Such policies is widespread both within countries and

Info icon This preview shows pages 96–98. Sign up to view the full content.

View Full Document Right Arrow Icon
such policies is widespread both within countries and internationally, bargaining power tends to shift from states to firms, and billions of dollars in dead-weight economic loss arise every year from competition to redistribute global production. Policy Applications In a policy context, researchers have studied the following question: What can policymakers to do to enhance the attractiveness of their locations and thus, increase the likelihood multinational firms will decide to choose the particular location? Much of the work in this area evolved from two important areas of research. First, new trade theory (see Krugman, 1994) introduced economies of scale into theories of international trade. In the extreme, some industries such as airplane manufacture and semiconductor fabrication are so costly to set up that the world might only support a very small number of firms. In such a case, a country
Image of page 96

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
91 could "win" a two-country game in which each country decides whether to subsidize its own firm so that firm is able to lower its cost and take the entire world market for producing a particular good (see Brander and Spencer, 1985). This type of policy is often referred to as "strategic trade policy". Despite there being no empirical evidence for the existence of industries with such extreme production structures that only support a single global firm (suitable subsidy targets), many billions of dollars are wasted every year by countries and states in subsidy games designed to "win" a larger share of global production. Knowing countries and states are willing to offer payments to lure and keep production gives firms an incentive to threaten to move. In many cases, these threats lead to bidding wars that reduce firms' costs at the expense of countries and states. Second, the publication of Michael Porter's “Competitive Advantage of Nations” (1998) also directly considered a positive role for governments in making locations more attractive. Unlike proponents of strategic trade policy, Porter advocated broader types of policy actions to enhance the attractiveness of a location. These actions include increased spending on education and R&D, government spending on infrastructure, institutional development, etc. This goal of these policies would be to create Silicon-Valley-like clusters by improving the quality of domestic factors of production such as labor and capital. Since high quality factors of production can be deployed across many different sectors, there is much less waste involved in policies that improve factor quality than in policies that merely seek to redistribute the location of existing economic activity. Location theory addresses the important questions who produces what goods or services in which locations, and why. Ideas from location theory have been widely used in international economics, in particular, to predict which countries will specialize in the production of certain goods for export, and which countries MNCs will choose as production locations. In early location models, factors of
Image of page 97
Image of page 98
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern