Jang Ping Thia,
Why Capital does not Migrate to the South: A New Economic Geography Perspective
Paper No' CEPDP0895:
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Keywords: Firm heterogeneity; capital mobility, economic geography
JEL Classification: F12; F15
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This Paper is published under the following series:
CEP Discussion Papers
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This paper explains why capital does not flow from the North to the South - the Lucas
Paradox - with a New Economic Geography model that incorporates mobile capital,
immobile labour, and productively heterogeneous firms. In contrast to neoclassical theories,
the results show that even a small difference in the ex-ante productivity distribution between
North and South can a have significant impact on the location of firms. Despite differences in
aggregate capital to labour ratios, wage and rental rates continue to be the same in both
locations. The paper also analyses the effects of risk on industrial locations, and shows why
‘low-tech’ industries tend to migrate to the South, while ‘high-tech’ industries continue to
locate in the North.