The Home Market Effect in Models with Multinational Enterprises

Trade patterns in new trade theory models and agglomeration patterns in new economic geography models crucially depend on the effect that a higher local demand leads to a larger share of production of these products, namely the home market effect. Multinationals can exploit higher foreign demand without incurring transport costs by setting up a plant abroad. This paper demonstrates that in the presence of multinationals the home market effect appears even in cases where it otherwise would not. But it works via a different channel, relying on the repatriation of profits rather than on interindustry trade. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.