Opening Economy and Regional Development - Comparative Advantage and Agglomeration Forces as Location Factors in Finland

Mika Widgrén, Markku Kotilainen, Nuutti Nikula and Ville Kaitila

No 1113, Discussion Papers from The Research Institute of the Finnish Economy

Abstract: The study examines the developments in production structures in Finnish regions and the differences in regional income levels and the causes that affect them in an integrating global economy as well as the challenges facing regional policies. The increasing openness of the world economy, the increasing competition it causes and its effect on Finlands regions is the central task of this study. We combine the classical theory of international trade based on comparative advantage about the specialisation of countries with the approach of the new economic geography and agglomeration forces about the specialisation of regions inside countries. The study is a pioneer in Finland because similar analysis of regional production structures and specialisation has not been done before. We find that the so-called agglomeration forces drive the location of production in Finland. These regional agglomeration forces are the economic size of the region and closeness to markets (so-called market potential), distance between companies producing intermediate and final products, scale effects, and the educational level and R&D activities. Centralisation of production also requires that workforce is willing to relocate and that the productivity growth in core areas is faster than on average. Because labour mobility is such a central requirement for production agglomeration the study also examines migration within Finland in the past 50 years. For regional policies the conclusion of the study is that agglomeration forces should not be constrained if they lead to and are caused by faster productivity growth in core regions. In Finland there are significant differences in public sector services per capita in different regions so that regions with low wage and tax revenues have more public sector services in per capita terms than the core regions. This means that it is very hard to stop migration flows using the community tax equalisation scheme.

Keywords: egional economy; agglomeration forces; comparative advantage; new economic geography (search for similar items in EconPapers)
JEL-codes: R12 R15 R38 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2007
New Economics Papers: this item is included in nep-geo and nep-ure
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