Why Capital does not Migrate to the South: A New Economic Geography Perspective

Jang Ping Thia

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper explains why capital does not flow from the North to the South - the Lucas Paradox - with a New Economic Geography model that incorporates mobile capital, immobile labour, and productively heterogeneous firms. In contrast to neoclassical theories, the results show that even a small difference in the ex-ante productivity distribution between North and South can a have significant impact on the location of firms. Despite differences in aggregate capital to labour ratios, wage and rental rates continue to be the same in both locations. The paper also analyses the effects of risk on industrial locations, and shows why 'low-tech' industries tend to migrate to the South, while 'high-tech' industries continue to locate in the North.

Keywords: Firm heterogeneity; capital mobility; economic geography (search for similar items in EconPapers)
JEL-codes: F12 F15 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-afr, nep-geo and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0895

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