The aim of this paper is to explain that the answer the question - in terms of economic performance, are the scale effects of countries more important than the scale effects of cities or are the scale effects of cities more important than the scale effects of countries?

In this paper we explore the relationship between the size of a country, the size of its cities, and the economic performance of the country. In order to do this we integrate three different literature, namely the literature on optimal country size, literature on historical processes of urbanisation and the performance of cities, and literature on the role of multinational firms in the global economy. Using an economic geography perspective, we demonstrate that the relationship between city-size and the prosperity of the nation state, to a much more complex set of relationships. In the modern era of globalisation the role of global companies within the city-region is critical, and city-regions in turn are seen to drive national economies. As such, the relationships between firms, cities and countries have been largely reversed, casting doubt on various institutional economic theories.

"Jena Economic Research Papers" is a joint publication of the Friedrich Schiller University and the Max Planck Institute of Economics, Jena, Germany.

Returning to the original question - in terms of economic performance, is the scale of a country more important than the scale of a city or is the scale of city more important than the scale of a country? - the arguments in this paper imply that in the current era of globalisation, Krugman’s emphasis on home-market and agglomeration effects (World Bank 2009) is a far more realistic explanation of national economic performance than the smallness arguments of Alesina and Spolaore (2005). Without any serious consideration of economic geography the Alesina and Spolaore (2005) arguments are reduced to a cultural-institutional twist on various fiscal federalism debates. Meanwhile, the fact that multinational investment patterns are characterised by global-regionalism in which knowledge-related investments are concentrated in global cities, suggests that globalisation has a far greater geographical logic to it than flat-earth proponents such as Friedman (2007) assume (McCann 2008). The relationship between the nation-state, the city-region and the multinational firm is the context (Storper 2009) in which globalisation processes operate, and it is a context which has not only been seen to have evolved over long historical periods, but one which has also changed radically even in the last two decades. Our knowledge of these relationships is still very limited (OECD 2008), not least because the relationships between MNE FDI activity and tax policy is so complex (OECD 2007a) in a rapidly globalising world (OECD 2007b). As John Dunning pointed out in his last ever publication (Dunning 2009), in order to better understand current globalisation processes, a much greater integration of the behavioural analysis of international business and multinational firms (Navaretti and Venables 2004) with the insights of economic geography is required, and this will require us to rethink many of our models (McCann and Mudambi 2004, 2005).

/06/2009

Philip McCann & Zoltan J. Acs

research

Urban Policy

Economy knowledge & employment