Globalization and the spatial concentration of production * Friederike Niepmann † and Gabriel J. Felbermayr ‡ January, 2009 Abstract New trade theory models predict that freer trade increases the spatial concentration of industrial production across countries. While nations with large home markets and cen- tral geographical location become increasingly attractive business locations, small peripheral countries gradually deindustrialize. Using data for 26 industries, 20 OECD countries and 20 years, we investigate the empirical validity of this claim. Separating out the role of home market size from geographical factors, and using various panel methods, we find robust ev- idence in line with theory. Freer trade has indeed magnified the importance of domestic demand and geographical location for the pattern of industrial production across the globe and has therefore exacerbated spatial disparities. Keywords : Home market effect, hub effect, trade liberalization, trade costs, increasing re- turns to scale, new trade theory, economic geography. JEL-Codes : F12, F15 * Parts of this paper were drafted when Niepmann was an intern at the World Bank. We are grateful to Mary Amiti, Michael Boehm, Matthieu Crozet, Benjamin Jung, Wilhelm Kohler, Andreas Kopp, and Davide Sala for comments and discussion. All remaining errors are ours. † Economics Department, European University Institute, Villa San Paolo, Via della Piazzuola 43, 50133 Flo- rence, Italy. E-Mail: Friederike.Niepmann@eui.eu. ‡ Corresponding author. Economics Department, University Hohenheim, Schloss Museumsfluegel 021, 70599 Stuttgart, Germany. E-mail: g.felbermayr@uni-hohenheim.de.