RESEARCH AND ANALYSIS
Regional integration and North-South industrial location: An application to the Euro-Mediterranean area
Corinne Bagoulla (University of Nantes), Nicolas PÚridy (University of South, Toulon-Var)
The process of integration in Europe began at the end of the fifties and has led in 2004 and 2007 to the enlargement of the European Union (EU) toward central and eastern European countries. In parallel, an historic partnership has been developed since 1995 between the EU and Mediterranean countries (the so-called Barcelona process). One aim of the Barcelona process is to reinforce the economic relationship between the EU and Mediterranean countries and to promote trade and economic growth in the area through an economic and financial partnership and the gradual establishment of a free-trade area. Since the latest EU enlargement, the Euro-Mediterranean partnership includes 37 members, of which there are 27 EU member states1 and 10 Mediterranean partners2.
Regional integration agreements reduce trade barriers between member countries while maintaining barriers with the rest of the world, which can have important consequences on the geographic distribution of activities. It gives an incentive for firms to locate in the integrated area as the market access of the ﬁrms operating within the area is improved. Less clear-cut is the relationship between the process of economic integration and the location of firms within the integrated area. Following the regional integration, firms can be tended to concentrate in the country that has the best access to the other countries’ markets (Baldwin et al., 2003). However, as it becomes less costly to export within the integrated region, ﬁrms can then have a greater incentive to concentrate their production in the country with the lowest production costs (Chen, 2008). Promoting integration between all countries belonging to the area and not only between small countries and the largest market seems very important in order to obtain a relatively uniform distribution of firms in integrated areas (Altomonte, 2007). The aim of our work is thus to investigate the spatial implication of increasing economic integration in the Euro-Mediterranean region. Does market accessibility largely differ between countries? What is the impact of differences in market accessibility on the location of manufacturing sectors?
The evaluation of trade barriers between countries belonging to the Euro-Mediterranean area3 reveals significant market segmentation in this area. Crossing the national border inside the Western European countries reduces trade by 4.5 times whereas it generates a decrease of trade by a factor of 7 in European new member states and more than 200 in the Mediterranean countries group. In addition, even if the market integration increased between 1990 and 2003, trade barriers remain very high especially within the “southern markets” (between Mediterranean countries and between new member states). This market segmentation could have a substantial impact on firms’ location choices.
We thus address the issue of the impact of market accessibility on the location of manufacturing sectors4 in the Euro-Mediterranean area. Our research shows that firms locate in areas where labour costs are lower and where the market and supply accesses are easier. Production costs are far from being the only determinant of the location of firms. Being in a peripheral position can thus be a strong disadvantage for Mediterranean countries and new member states even if those countries benefit from lower labour costs. These results suggest that both better “North-South” and “South-South” integration are a necessity for firms to settle in new European member states and Mediterranean countries5.
The issue of the impact of international openness on industries’ geographic distribution is also addressed. Due to international competition, industries (especially low-technology industries) have chosen to locate in countries with lower production costs. Thus, international trade openness can act as a dispersion force in an integrated “North-South” area as it could generate the relocation of some manufacturing firms from Northern countries to Southern countries. Southern countries may be able to take advantage of greater international integration, associated with a higher regional integration one.
The Euro-Mediterranean area has raised concerns among economists and policy makers as well. It was thought that the very peripheral position of new member states and Mediterranean countries, not only with respect to Western Europe but also within their respective regions, would have represented a serious obstacle to their economic development. Our results seem to conﬁrm this pessimistic picture. Overall manufacturing activity is attracted by low wages and a good business environment, but access to large markets really matters. A deeper integration in the Euro-Mediterranean area could lead to the location of industries in Southern countries by promoting their access to larger markets. However, a deeper “South-South” integration is also a condition for this experiment to succeed. At this time, new member states benefit from better market accesses than Mediterranean countries.
These results must be interpreted cautiously. Clearly, several reﬁnements can be added to the current setup. First, even if the main countries in the Euro-Mediterranean area are introduced in the database, some countries are missing and this can impact the results on geographic concentration. In addition, because of the low level of sectoral disaggregation, we cannot account for the fragmentation of the manufacturing production in each sector.
1. Ten countries of Central and Eastern Europe (Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia) joined the EU in 2004. In January 2007, the addition of two more countries (Bulgaria and Romania) brought the number of EU member states to 27 countries. back to text
2. Algeria, Tunisia, Morocco, Turkey, Jordan, Israel, Egypt, the Palestinian territories, Lebanon and Syria. back to text
3. We evaluate the significance of trade barriers and their evolution within the area using a theoretical gravity equation to bilateral trade flows between 28 countries belonging to the Euro-Mediterranean area over the period 1994-2003. back to text
4. Considering 28 countries belonging to the Euro-Mediterranean area, we derive an estimating equation of industrial location from a standard New Economic Geography (NEG) model which considers production costs and both supply and market accesses as the main determinants of industrial location. back to text
5. These results are conformed to those of Altomonte (2007) and Resmini (2003). back to text
Corinne Bagoulla is a Senior Lecturer in Economics at the University of Nantes (France). Corinne Bagoulla's primary research interests and publications are in the areas of international trade theory, economic geography and maritime transport.
Nicolas Peridy is Professor of Economics at the Université du Sud Toulon-Var (France). His research topics mainly include international trade, regional integration, FDI and migration. He has published about 30 articles in international reviews, such as World Economy, Review of World Economics, Journal of economic integration, Economics Letters, International Economic Journal, etc. He is consultant for several international organizations including the World Bank as well as the European Commission (FEMISE network).