Geographie Transaction Costs and Specialisation Opportunities of Small and Medium-Sized Regions: Scale Economies and Market Extension

In recent decades an embryo of a new theory of specialisation and trade has been developed with an emphasis on differentiated competition, scale economies and size of the “home market” (e.g. Krugman, 1990). As regards the size of the home market several contributions focus on the country as the potential home market (e.g. Porter, 1990), which may be described as an ad hoc approach without any clear theoretical underpinning. In response to this type of deficiencies, this paper introduces a theoretical framework based on the concepts of a functional region and its product-specific market potentials. This approach is developed to improve the analysis of small and medium-sized regions, with an emphasis on their internal and external market interactions.