Agglomeration Of Heterogeneous Firms Based On Different Labor Cost

Although the new-new economic geography theory broke through the limitations of homogeneity assumption in the new economic geography theory, but the new-new economic geography theory continues the idea of the new economic geography theory, the new-new economic geography theory focuses on market size’s effect on the agglomeration of heterogeneous firms, but neglects the effect of labor cost which is a important supply factor. In today’s economic integration, the economic exchanges between developed regions and less developed regions are increasingly closing, so using new-new economic geography theory to explain the agglomeration of heterogeneity enterprises between developed regions and less developed regions is inappropriate. To this end, this paper constructs an agglomeration model in which enterprises are heterogeneous and labor cost is different. But existing new-new economic geography theory models are different, so this article builds a baseline model with big flexibility under the framework of the new-new economic geography theory firstly and explore the existing new-new economic geography theory models through change the assumption of the baseline model. Through research we found that although the existing new-new economic geography theory models have pointed out that a large market is more attractive to the high efficient firms, but the reasons are different, and in some cases, the big market is not necessarily just to attract high-efficiency enterprises, it will also attract inefficient firms. Then we build an agglomeration model in which enterprises are heterogeneous and labor cost is different on the basis of the baseline model, the model showed that some of the firms with low efficiency gathered in the underdeveloped area when trade cost is high, the rest are concentrated in the developed region; when trade cost decline, the inefficient firms transfer to the underdeveloped area, when all of the inefficient firms are concentrated in the less developed region, the further decline of trade cost will make the high-efficiency firms transfer to the underdeveloped area, which narrow the economic gap between the developed area and the underdeveloped area, and the productivity gap expand first and then shrink. We use the enterprises data of textile, apparel manufacturing industry and cotton, chemical fiber textile processing industry in Jiangsu Province from2002to2007for Empirical study, the empirical study also confirms the conclusions of the model. This paper conclusion shows that the underdeveloped region’s subsidy policy which’s aim is to increase the productivity level of region is invalid, these subsidies will only attract more inefficient enterprises.