TRADE UNITS LIKE the EU, NAFTA in North America and ASEAN in Asia together with WTO are working towards an increase in global trade liberalisation and contribution to the current development. From a Halland perspective, it is interesting trying to understand how the development of the EU internal market will affect production opportunities in Halland.
BACK IN ANCIENT TIMES, Platon described profits from work sharing and trade where transportation costs were an important factor. From that perspective, geographic closeness between production stages was important. This closeness was the driving force when establishing a state/city. The accomplished trade theory stresses that specialisation and trade promote increased wealth. Specialisation happens when countries have a so called comparative advantage. To obtain this advantage, the country needs substantial assets of production factors used in production. Changes in assets or the use of production factors, changes production patterns and industry structures.
ACCORDING TO NEG, specialisation happens in spite of identical financial structures where market size (using scale factors) and trade costs are critical. Companies with scale factor advantages that concentrate production to one location, usually set it up in a large market. The reason is reduced trade costs, eg transportation costs. This effect is called the home market effect and is stronger in medium high trade costs. High costs establish production close to the market outlet while low costs concentrate and use scale factors close to large markets, ie the home market effect. Even lower costs, might locate to areas with low production costs, not necessarily close to production factors or market outlets. This effect is discussed in many countries as outmigration of companies to low-cost countries, so called off shoring. Production relocation can be expected only when production costs are considerably lower than trade costs.
DEREGULATION AND integration as well as focus on core business increase the importance of service production in new companies. Today, service export is the fastest growing business in Swedish foreign trade. A well organised telecommunication infrastructure has resulted in a geographically widespread service production. There are still service trade obstacles within EU which the EU 2006 Directive of Services is trying to counteract. As a result, there is a larger home market effect in services within EU as they do not have the same free mobility as goods.
STUDIES SHOW THAT the home market effect is important to location for app. half of the OECD industries. EU locations are facing a lower concentration in businesses where the effect was expected to be strong. A possible interpretation is a far-reaching EU integration where increased integration results in profitability when companies move production to the periphery rather than concentrating it to the large markets. If that is the case, it could be small regions in the EU outskirts – like Sweden and Halland – that benefit from an increased EU market integration.