Expansion Economies

According to the new international trade theory, trade need not be the result of international differences in technology and factor endowments. Instead, trade is the result of the exploitation of scale economies. Under increasing returns, trade is similar to the growth of the labor force and regional agglomerations. Nevertheless, these findings cannot be generalized to all kinds of firms and industries. It is true that in certain cases centripetal forces caused by scale and agglomeration economies can compel firms to cluster in a given geographical area and become localized. In other cases, however, because of centrifugal increasing returns stemming from expansion economies, firms have incentives to become global. This paper develops a simple model of expansion economies and shows that they are a special case of increasing returns that cause the growth of the firm by its dispersion, thus they are completely different from scale economies. In order to exploit economies of expansion, manufacturing firms tend to expand their economic activities to different locations, regions and countries. The level to which firms spread out in different region depends on the local demand. When such local demand is completely satisfied by the firm, it may decide to star business activities in another region, and so on.