Economic Integration, Monopoly Power and Productivity Growth without Scale Effects

• Date: 01 February 2016
• Author: Colin Davis,Ken‐ichi Hashimoto
• DOI: http://doi.org/10.1111/rode.12200
• Published date: 01 February 2016

Economic Integration, Monopoly Power and

Productivity Growth without Scale Effects

Colin Davis and Ken-ichi Hashimoto*

Abstract

This paper considers how monopoly power affects the relationship between economic integration and eco-

nomic growth that is not biased by a scale effect. In a two-country model of trade, productivity growth is

generated by firm-level investment in process innovation, and the location of economic activity is deter-

mined by relative market size, trade costs and imperfect knowledge diffusion. Equilibrium features the

partial concentration of manufacturing and the full concentration of innovation in the larger country.

Increased economic integration raises the concentration of manufacturing in the larger country, and when

monopoly power is strong, leads to decreased product variety, accelerated productivity growth and greater

national welfare. With weak monopoly power, however, it raises product variety and dampens productivity

growth, but may benefit or hurt welfare.

1. Introduction

The last several decades have witnessed a dramatic trend towards economic integra-

tion at local, regional and national levels as the costs of transporting information and

goods have declined. In East Asia, falling communication and transport costs (Dee,

2007) and unilateral tariff-cutting (Baldwin, 2008) have lead to greater integration

between national economies, with a rise in the share of intra-regional manufacturing

trade from 36% in 1986 to 55% in 2006 (Athukorala and Kohpaiboon, 2010). This

improved regional integration has coincided with, and arguably been the impetus for,

shifts in economic activity towards the concentration of industry in specific geographic

locations (He, 2009). Indeed, Gill and Kharas (2007) estimate that 75% of annual

output is now produced in cities in East Asia, and Crescenzi et al. (2012) find that

innovation activity is even more geographically concentrated than manufacturing.

While casual observation suggests a causal relationship between regional integra-

tion and industry concentration in East Asia, the consequences for economic growth

are less clear. The theoretical conclusions of the new economic geography (NEG) lit-

erature tend to predict a positive relationship between industry concentration and

economic growth (Baldwin and Martin, 2004), but the empirical evidence is generally

mixed. Abdel-Rahman et al. (2006) report a negative relationship between

urbananization and economic growth for a sample of developing countries, however,

Brülhart and Sbergami (2009) conclude that the relationship between growth and

industry concentration depends on the level of economic development. In China,

positive effects of industry concentration are observed for labor productivity (Chen,

* Davis: The Institute for the Liberal Arts, Doshisha University, Karasuma-Higashi-iru, Imadegawa-dori,

Kamigyo, Kyoto, Japan, 602-8580. Tel: +81-75-251-4971; E-mail: cdavis@mail.doshisha.ac.jp. Hashimoto:

Graduate School of Economics, Kobe University, 2-1 Rokkodai, Nada, Kobe, Japan. The authors are

grateful for helpful comments from an anonymous referee, Tatsuro Iwaisako, Nobuaki Hamaguchi, and

participants of ETSG 2014. They acknowledge financial support from JSPS through a Grant-in-Aid for Sci-

entific Research (C) and a Grant-in-Aid for Young Scientists (B). All remaining errors are those of the

authors.

Review of Development Economics, 20(1), 152–163, 2016

DOI:10.1111/rode.12200

©2015 John Wiley & Sons Ltd