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Abstract

We investigate the effect of country size differentials and Ricardian technology differences on firms’ location decisions using a two-country, two-good (homogeneous agricultural good and differentiated manufacturing products), two-factor (labour and footloose capital) simple new economic geography model. We found that manufacturing firms may agglomerate in a country where the manufacturing sector has a comparative disadvantage. In addition, when country size differentials and Ricardian technology differences exist between two countries, the key factor influencing firms’ location decisions changes according to the level of trade liberalization, from being market size-dependent to becoming technology-dependent.