Industry relocation, linkages and spillovers across the Baltic Sea: Extending the footloose capital model

Abstract

Studying the recent relocation of manufacturing industries from the Nordic countries to the Baltic countries, this paper provides an empirical application of the footloose capital model, a framework for spatial analysis. The model is extended to include input-output linkages and FDI spillovers. It is calibrated and applied, industry by industry, to a 3×3 matrix of Baltic countries and Nordic countries and to the pairing of these blocs. Simulation results are compared with 'real world' data and discussed in regard to testability restrictions of the footloose capital model. Incorporation of vertical linkages and spillovers can improve the goodness of fit, but while the predicted direction of industry relocation is often correct, predicted levels are not.