On home market effects and firm heterogeneity

This paper reassesses the home market effect in the light of firm-level heterogeneity. Industries with high barriers to trade, less differentiated products and high productivity dispersion are more likely to concentrate in larger markets. These results differ partly from the predictions of models without selection into exporting. In the presence of economies of scale firms tend to locate in markets where export selection is less competitive. These predictions are confirmed in an empirical investigation based on 34 OECD countries and 118 sectors.