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Abstract:
Using a detailed and large data set on cross-border merger and acquisitions we discuss the relationship between theory and observed empirical characteristics: (i) most FDI is in the form of M&As, (ii) firms engaged in M&As seem to be 'market-seeking', (iii) M&As come in waves (the most recent wave is still unfolding), (iv) economic integration (international deregulation) stimulated M&As, (v) the size of and inequality between M&As grows over time. Our contention in this chapter is that these stylized facts drive and should drive recent theoretical contributions in the field of international economics that try to understand cross-border mergers and acquisitions. Although some models (notably Neary, 2003) explain a number of the characteristics, a full-fledged model of cross-border M&As that, at least in principle, can deal with all the characteristics is still lacking.

Abstract:
By combining two large data sets (on international trade flows and on mergers and acquisitions - M&As), we are able to test two implications of Neary's (2003, 2004a) recent theoretical work. Analyzing M&As in a General Oligopolistic Equilibrium (GOLE) model incorporating strategic interaction between firms in a general equilibrium setting, we argue that: (i) M&As follow revealed comparative advantage as measured by the Balassa index, and (ii) M&As come in waves. We find convincing support for both hypotheses, thus showing for the first time that there is an empirical connection between export performance and mergers and acquisitions.

comparative advantage, cross border mergers and acquisitions, merger waves, general oligopolistic equilibrium model

Abstract:
By combining two large data sets (on international trade flows and cross-border mergers and acquisitions - M&As), we test two implications of Neary's (2003, 2007) general oligopolistic equilibrium (GOLE) model (incorporating strategic interaction between firms in a general equilibrium setting). In terms of economic importance, the dominant merger wave variable is a positive global-all effect, indicating that M&A waves are an economy-wide, global phenomenon. Country-specific merger wave variables are of secundary importance. In accordance with the bilateral GOLE model as specified by Neary, we find strong evidence that acquiring firms operate in strong sectors. However, we also find (less pronounced) evidence that target firms are active in strong, not weak sectors, which we label the 'target paradox'. We show how a multi-country extension of the GOLE model that allows for firm heterogeneity can explain this target paradox.

Comparative Advantage, Cross-border Mergers and Acquisitions, Merger Waves, General Oligopolistic Equilibrium Trade Model

Abstract:
Thomas Friedman's book the world is flat has been a bestseller since it appeared in 2005. The remarkable success of the book reflects to a certain extent the present fears with respect to increasing globalization. Using many examples, Friedman argues that distance (however defined) is no longer a dominant characteristic of the world economy, or will cease to be so in the very near future. Competition is thought to be a race to the bottom, with the lowest-wage countries as the big winners. We disagree, and with us many other economists (see, for example, Leamer, 2006). Distance dominates all aspects of international trade and many stylized facts of international trade can only be understood by pointing towards the importance of distance. Furthermore, there is little evidence of income convergence. Using various methods and data sets, we show that many threats of global competition for the position of the traditionally developed (OECD) countries are unwarranted.

income levels, convergence, trade, distance, leapfrogging

Abstract:
We construct a unique data set to analyze whether or not a large temporary shock had an impact on German city growth and city size distribution. Following recent work by Davis and Weinstein (2001) on Japan, we take the strategic bombing of German cities during WWII as our example of such a shock. The goal of this paper is to analyze the impact of this shock on German city growth and the resulting city size distribution. If city growth follows a random walk this would imply that the war shock had a permanent impact on German city growth. If, however, as a second group of theories predicts, the random walk hypothesis is not confirmed, this would mean that the war shock had at most a temporary effect on the city growth process. Our main finding is that city growth in western Germany did not follow a random walk, while in eastern Germany it did. Different post-war economic systems are most likely responsible for this outcome.

Abstract:
In this paper we want to shed some light on the empirical relevance of the new economic geography. Using one of the central features of the core new economic geography models, namely that wages have the tendency to fall the further one moves away from centres of economic activity, we investigate the existence of a spatial wage structure for post-unification Germany. We find support for a spatial wage structure for German city-district wages, and hence indirectly for the relevance of a new economic geography model for Germany. We also find that demand linkages in Germany are strongly localised and that the "old" border still matters to the extent that economic interactions between western and eastern Germany are still limited compared to the situation within these two parts of Germany.

New Economic Geography, Spatial Wage Structure, Germany

Abstract:
The 2008 Nobel prize for economics was awarded to Paul Krugman for three papers - Krugman (1979, 1980, 1991). In this paper we illustrate that, indeed, these three papers are closely connected. We present - a summary of - the papers using a unified framework. Central in the discussion is the so-called home market effect that was already alluded to in Krugman (1979). We evaluate his work and conclude that these three papers changed and improved the way economists think about trade and geography.

Abstract:
Most FDI takes place between the developed countries, which suggests that the market-seeking motive is important for understanding FDI. However, given the stylized fact that trade barriers (e.g. transportation costs and financial barriers) have declined over the past 20 years, models that aim to explain market-seeking FDI tend to predict a decline in FDI. Neary (2008) offers two explanations for this puzzle: (1) the export platform motive (where firms gain access to an integrated market by investing in one of the "integrated" countries); (2) Neary's (2007) GOLE model, which explains cross-border mergers and acquisitions (this model is of interest since most FDI comes in the form of M&As). By using a gravity framework, where we also deal with the "zero gravity problem", we confirm the predictions of the GOLE model.

cross-border M&As, financial openness, economic integration

Abstract:
With the completion of EMU, tax competition and, more in general, locational competition is high on the EU policy agenda. In contrast to the standard neo-classical reasoning, recent advances in the theory of trade and location have shown that tax competition does not necessarily lead to a "race to the bottom". In these recent discussions the relevance of government spending as an instrument for locational competition is unduly neglected. We therefore introduce a more elaborate government sector in a geographical economics model by analyzing government spending and government production. By changing the relative size, direction or efficiency of the production of public goods, our simulation results show that governments can change the equilibrium between agglomerating and spreading forces. In addition, we show analytically that the introduction of public goods fosters agglomeration. Ultimately, our paper shows that by restricting attention to taxes, one ignores that government spending also determines the attractiveness of a country as a location for the mobile factors of production.

Abstract:
The evolution of city growth is usually studied for relatively short time periods. The rise and decline of cities is, however, typically a process that takes many decades or even centuries. In this paper we study the evolution of Italian cities over the period 1300-1861. The first contribution of our paper is that we use various descriptive statistics on individual city sizes and the city-size distribution as a whole to highlight the main characteristics of Italy's urban system such as the differences between northern and southern Italy. Our second, and main, contribution is that our data allow for panel estimation where city-size is regressed on various geographical, political and other determinants of city size for the period 1300-1861. We show that, although large shocks such as the plague epidemics are clearly visible in the data, the main determinants of Italy's city growth invariably are physical geography and political predominance. Also the North-South difference turns out to be important.

Abstract:
For reasons of analytical tractability, new economic geography (NEG) models treat geography in a very simple way: attention is either confined to a simple 2-region or to an equidistant multi-region world. As a result, the main predictions regarding the impact of e.g. diminishing trade costs are based on these simple models. When doing empirical or policy work these simplifying assumptions become problematic and it may very well be that the conclusions from the simple models do not carry over to the heterogeneous geographical setting faced by the empirical researcher or policy maker. This paper tries to fill this gap by adding more realistic geography structures to the Puga (1999) model that encompasses several benchmark NEG models. By using extensive simulations we show that many, although not all, conclusions from the simple models do carry over to our multi-region setting with more realistic geography structures. Given these results, we then simulate the impact of increased EU integration on the spatial distribution of regional economic activity for a sample of 194-NUTSII regions and find that further integration will most likely be accompanied by higher levels of agglomeration.

Abstract:
It is sometimes argued that news reports in the media suffer from biased reporting. Mullainathan and Shleifer (2002) argue that there are two types of media bias. One bias, called ideology, reflects a news outlet's desire to affect reader opinions in a particular direction. The second bias, referred to as spin, reflects the outlet's attempt to simply create a memorable story. Competition between outlets can eliminate the effect of ideological bias, but increases the incentive to spin stories. We examine whether we find some evidence of spin in Dutch newspaper reporting on the state of the economy. If newspapers are indeed able to create memorable stories this should, according to our hypothesis, affect the opinion of readers with respect to the state of the economy. Sentiments about the actual state of the economy could be magnified by spin. As a result, consumer confidence - a variable that routinely measures the opinion on the state of the economy - can be expected to be affected not only by economic fundamentals, but also by the way these fundamentals are reported. We construct a variable that reflects the way consumers perceive economic news reported in newspapers. We find that this variable indeed has a significant impact on consumer confidence, which is short-lived.

Abstract:
Based on a new economic geography (NEG) model by Puga (1999), we use the equilibrium wage equation to estimate two key structural model parameters for the NUTS II EU regions. These estimations enable us to come up with an empirically grounded free-ness of trade parameter. In line with NEG theory, the estimation results show that a spatial wage structure exists for the EU regions. By going back to the theoretical model we then analyze the implications of the free-ness of trade parameter for the degree of agglomeration. Our main findings suggest that agglomeration forces still have only a limited spatial reach in the EU. Agglomeration forces appear to be rather localized. At the same time, confronting our empirical results with the underlying new economic geography model also brings out the limitations of empirical research in new economic geography.

Abstract:
In the European Union, energy markets are increasingly being liberalized. A case in point is the European natural gas industry. The general expectation is that more competition will lead to lower prices and higher volumes, and hence higher welfare. This paper indicates that this might not happen for at least two reasons. First, energy markets, including the market for natural gas, are characterized by imperfect competition and increasing costs to develop new energy sources. As a result, new entrants in the market are less efficient than incumbent firms. Second, energy markets, again including the market for natural gas, are associated with capacity constraints. Prices are determined in residual markets where the least efficient firms are active. This is likely to lead to price increases, rather than decreases.

Abstract:
The empirical literature on city size distributions has mainly focused on the USA. The first major contribution of this paper is to provide empirical evidence on the evolution and structure of the West-German city size distribution. Using a unique annual data set that covers most of the 20th century for 62 of West-Germany's largest cities, we look at the evolution of both the city size distribution as a whole and each city separately. The West-German case is of particular interest as it has undergone major shocks, most notably WWII. Our data set allows us to identify these shocks and provide evidence on the effects of these 'quasi-natural experiments' on the city size distribution. The second major contribution of this paper is that we perform unit-root tests on individual German city sizes using a substantial number of observations to analyze the evolution of the individual cities that make up the German city size distribution. Our main findings are twofold. First, WWII has had a major and lasting impact on the city size distribution. Second, the overall city size distribution does not adhere to Zipf's Law. This second finding is largely based on the results of unit root tests for individual cities to test for Gibrat's Law, the latter being a requirement for Zipf's Law to hold for the overall city-size distribution. Together these two findings are consistent with theories emphasizing increasing returns to scale in city growth.

Abstract:
In explaining the uneven spatial distribution of economic activity, urban economics and new economic geography (NEG) dominate recent research in economics. A main difference between these two approaches is that NEG stresses the role of spatial linkages whereas urban economics does not do so. We estimate simple versions of these two views on economic geography and also establish if the relevance of spatial linkages varies across aggregation levels or time. For our sample of 14 European countries and 213 corresponding regions, we find that spatial linkages are more important at the country level and that its relevance varies across time.

Abstract:
Many modern trade and growth models are characterized by multiple equilibria. In theory the analysis of multiple equilibria is possible, but in practice it is difficult to test for the presence of multiple equilibria. Based on the methodology developed by Davis and Weinstein (2004) for the case of Japanese cities and WWII, we look for multiple equilibria in a model of German city growth. The strategic bombing of Germany during WWII enables us to assess the empirical relevance of multiple equilibria in a model of city-growth. In doing so, and in addition to the Davis and Weinstein framework, we look at the spatial inter-dependencies between cities. The main findings are twofold. First, multiple equilibria seem to be present in German city growth. Our evidence supports a model with 2 stable equilibria. Second, the explicit inclusion of geography matters. Evidence for multiple equilibria is weaker when spatial interdependencies are not taken into account.

Abstract:
Recent studies of border effects have focused on the intra-country and inter-country comparison of trade flows. It is found that borders have a negative impact on the size of cross-border trade. In order to estimate border effects on a regional level one needs not only data on inter-country but also on intra-country trade. For many countries (regional) data on intra-country trade are simply lacking, which makes an analysis of border effects and border regions cumbersome. In this paper we take a different approach to measure the impact of borders. We estimate a market potential function for German regional wages and by analysing whether German border regions can be distinguished from the other regions in terms of their wages. We use a market potential function because its basic idea (regional wages fall the further one moves away from economic centers) can be grounded on different trade theories and also because the resulting wage equation is related to border effect studies based on trade flows. We use a data set for 441 German districts for the years 1992 and 1995. In general, we find some evidence that is consistent with the existence of border effects but this evidence is probably better looked upon as an indication of a strong localisation of demand spillovers on regional wages in general. Even though border effects can not be ruled out, the overriding outcome is that of a strong localization of demand spill-overs for all German regions.

economic geography, empirical estimation, Germany

Abstract:
In the famous debate between Keynes and Ohlin on the transfer problem, the interaction between non-traded goods and unemployment complicates the analysis considerably. We analyze these issues using four different models to conclude that Keynes's concern regarding the large burden imposed on Germany was justified. Simultaneously, we show that Ohlin's presumption that a transfer does not affect the donor's terms-of-trade either favourably or unfavourably was also justified. Moreover, Ohlin was also right in asserting that a transfer tends to lower the price of non-traded goods for the donor and raise them for the recipient.

Abstract:
A key issue in development economics is the explanation of core-periphery patterns around the world. Combining this issue with that of analyzing unilateral transfers (e.g. foreign aid) points in the direction of the use of New Economic Geography (NEG) models which, so far, has not been done explicitly. This paper tries to fill this gap in the literature by studying the (possibly 'catastrophic') effects of aid around the so-called break-points and sustain-points in a NEG model. We also analyze the effects of a 'bystander', that is a country which is not directly involved in the transfer. In the traditional transfer literature a bystander is known to potentially cause transfer paradoxes. Our findings in this NEG setting are as follows. First, direct transfer paradoxes are not possible in a symmetric setting even if a bystander is present. Second, the effects of foreign aid depend on the level of economic integration between donor and recipient. Third, if the equilibrium from which aid is given is stable, aid only has a temporary effect (even if there is a bystander present). Fourth, if the donor is relatively large, not only the recipient but also the bystander benefits from foreign aid.

Abstract:
Using German district data we estimate the structural parameters of a new economic geography model as developed by Helpman (1998) and Hanson (1998, 2001a). The advantage of the Helpman-Hanson model is that it incorporates the fact that agglomeration of economic activity increases the prices of local (nontradable) services, like housing. This model thereby provides an intuitively appealing spreading force that allows for less extreme agglomeration patterns than predicted by the bulk of new economic geography models. Generalizing the Helpman-Hanson model, we also analyze the implications for the spatial distribution of wages once the assumption of real wage equalization is dropped. If we no longer assume real wage equalization we find support for a spatial wage structure as well as for the relevance of the structural parameters of the theoretical model.

Abstract:
Spatial heterogeneity at the city level is crucial for explaining local inequality. This heterogeneity will continue from a cultural perspective, an age profile perspective, and a productivity perspective. The process of catching up to the technological leader is influenced by geographic proximity and local input–output linkages, particularly to upstream industries. Heterogeneity of urbanization patterns and spatial linkages affect foreign direct investment flows. The relative power of the economic agglomerating and spreading forces are not scale neutral but heterogeneous, more specifically: spatial linkages are found to be more important at higher levels of aggregation.

Abstract:
In explaining the uneven spatial distribution of economic activity, urban economics, and new economic geography (NEG) dominate recent research in economics. A main difference between these two approaches is that NEG stresses the role of spatial linkages whereas urban economics does not do so. We estimate simple versions of these two views on economic geography and also establish if the relevance of spatial linkages varies across aggregation levels or time. For our sample of 14 European countries and 213 corresponding regions, we find that spatial linkages are more important at the country level and that its relevance varies across time.

Abstract:
Thomas Friedman, a very influential and widely read journalist (author of The World is Flat), argues that distance is no longer a dominant characteristic of the world economy. Competition is thought to be a race to the bottom, with the lowest wage countries as the big winners. In contrast, using various methods and data sets, we show that many threats of global competition for the position of the traditionally developed (Organization for Economic Cooperation and Development) countries are unwarranted, that distance still dominates all aspects of international trade and that there is little evidence of income convergence.

income levels, convergence, trade, distance, leapfrogging, E0, F0, N0, O0