Skip to main content Accessibility help
×
Hostname: page-component-7c8c6479df-xxrs7 Total loading time: 0 Render date: 2024-03-27T14:13:10.832Z Has data issue: false hasContentIssue false

6 - Economic policy and the manufacturing base: hysteresis in location

Published online by Cambridge University Press:  13 January 2010

Joseph F. Francois
Affiliation:
Erasmus Universiteit Rotterdam
Get access

Summary

Introduction

Discussion of industrial policy often refers to the importance of maintaining a ‘manufacturing base’, and suggests that there may be some level of activity below which contraction of manufacturing may be difficult to reverse. In simple economic models it is difficult to make sense of this line of reasoning. An adverse shock to industry in one country may cause exit or relocation of firms, but, if the shock is reversed, then those remaining earn a higher return than in the original equilibrium. Entry will occur, and the equilibrium will revert to the initial position.

There are several circumstances in which this need not be the case. One is when there are sunk costs associated with entry and exit (as in the ‘beachhead’ models of Baldwin and Krugman (1989) and Dixit (1989)). It may take a large shock to attract new entrants (importers, in the literature referred to), but once they have paid their fixed costs they are difficult to dislodge. Another circumstance is when there are positive ‘linkages’ between firms in the industry, these linkages causing profits to be an increasing, rather than decreasing, function of the number of firms in the location. With such linkages there is a high degree of interdependence between the location decisions of different firms, and this creates the possibility of agglomeration of activity. An adverse shock may then destroy one centre of activity and cause others to form, in which case, even if the shock is reversed, its effects may not be.

Type
Chapter
Information
Publisher: Cambridge University Press
Print publication year: 1999

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×