Trade and Endogenous Formation of Regions in a Developing Country

28 Pages Posted: 31 Mar 2008

See all articles by Thomas Gries

Thomas Gries

University of Paderborn

Wim Naudé

RWTH Aachen University; IZA Institute of Labor Economics; Maastricht School of Management


The authors present a model of regional catching-up and development without scale effects. Regional growth is driven by technological imitation which is determined by positive externalities from international trade, the regions geography, and regional institutions. For the two regions considered, factor endowments are immobile land and human capital which is perfectly mobile between the two regions. Endogenous formation of regions is analyzed by introducing a non-symmetric decrease in international transaction costs, reflecting the different geography and institutions in the two regions. Using panel data from 354 South African magisterial districts over the period 1996 to 2000, we find that geography is important in explaining trade patterns. As predicted, regions that are larger in terms of economic size, with good foreign market access and know-how of foreign markets, competitive transport costs and a good local institutional support framework will be more successful in exporting manufactured goods than other regions.

Suggested Citation

Gries, Thomas and Naudé, Wim, Trade and Endogenous Formation of Regions in a Developing Country. Review of Development Economics, Vol. 12, Issue 2, pp. 248-275, May 2008, Available at SSRN: or

Thomas Gries (Contact Author)

University of Paderborn ( email )

Warburger St. 100
Paderborn, D-33098

Wim Naudé

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072

Maastricht School of Management ( email )

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Maastricht, Limburg 6201 BE

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