Regional Integration, Scale Economies and Industry Location in the European Union

We analyse the effects of increasing returns and regional integration on industry location and trade. Theoretically, we show that regional integration can induce a non-monotonic locus of industry location inside the customs union, with initial dispersion to the periphery and later concentration in the core. Relationships of locational dispersion with scale economies (monotonically negative) and with regional integration (non-monotonic) also apply to equilibrium levels of intra-industry trade (IIT). Empirical evidence for the EU conforms to the theoretical predictions. Industrial specialisation among EU countries increased in the 1980s. Employment in scale-intensive industries tends to be concentrated at the centre of the EU. An IIT growth reversal is detected for the scale-intensive industries, which supports the non-monotonicity predicted by the model.