Opening-up, Regional Integration And Welfare

Based on a footloose capital model of a two-region home country and the other foreign country, this paper explores the impacts of international and interregional integrations on the spatial distribution of industries and the social welfare. We find that international integration has different effects other than regional integration within a country. Other things being equal, increased international integration leads regional gap in terms of industrial size to firstly increase then decrease, therefore a very low or high level of international integration helps to reduce regional gap. By contrast, increased regional integration within the home country attracts more capital to the home, but leads to higher regional gap within it. That is to say, the large region benefits more than the small one from regional integration.In terms of welfare effects, when a country gradually increases its international integration, the welfare of its consumers firstly increases then decreases. So there must be an optimal level of international integration, which would improve as the increasing level of regional integration. Therefore, after the regional integration is strengthened, one country can further enhance the level of international integration to increase consumer's welfare. This conclusion theoretically proves that the gradual opening-up policy of "increasing the level of international integration and at the same time continuing to strengthen the domestic regional integration" is one country's reasonable choice. When a country increases regional integration, its consumers'welfare always increases.