Abstract
We show that manufacturing firms tend to locate only in northern regions when transportation costs are not high, and in both northern and southern regions when transportation costs are high. We made this determination through the use of a semi-endogenous research and development growth model that reflects international trade, footloose capital, and local knowledge spillover. Regional income inequality—defined here as differences in per-capita expenditure relative to the price index—decreases in the former scenario following globalization, as the northern share of expenditure does not change. This lack of change stems from there being a constant and exogenous growth rate. Additionally, the northern price index does not change, even as the southern price index decreases.
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