Market Potential and the Location of Japanese Investment in the European Union

Thierry Mayer and Keith Head

No 3455, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We investigate the hypothesis that firms prefer to locate ``where the markets are." We use a theoretical model of location choice under imperfect competition to formalise this concept. The model yields an equilibrium profit equation incorporating a term closely connected to the market potential index introduced by Harris in 1954. The location decision is a function of demand in all locations weighted by accessibility to consumers. We also show how the spatial distribution of competitors should be factored into the location choice. We then implement the model empirically, comparing our theoretically-derived measure of market potential with Harris' term and with ad hoc agglomeration variables. Our sample consists of firm-level location choices by Japanese firms between 1984 and 1995 and we use both the information on the choice of country and the choice of region inside each country in our analysis. Our results show that market potential does matter for location choice but that traditional agglomeration variables retain an important role in the location decision.

Keywords: Location choice; Borders; European union (search for similar items in EconPapers)
JEL-codes: F12 F15 (search for similar items in EconPapers)
Date: 2002-07
New Economics Papers: this item is included in nep-eec and nep-geo
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Citations: View citations in EconPapers (38)

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