When firms interact with foreign markets, they have to deal with challenges not faced on the domestic market as transport- and interaction costs are higher. This holds for all types of interactions, such as geographical, socio-economic, cultural and institutional distance. When interacting with foreign markets, firms have to overcome this liability of distance and foreignness. An illustration of its importance is the dominance of nearby trade- and investment flows, as shown by the gravity model. We also review the decision of firms to interact via trade flows or multinational activities, where scale economies, transport costs, market size and local production costs all play a crucial role. The proximity versus concentration trade-off explains the choice of exporting versus horizontal FDI. The difference in production costs versus transport costs explains the choice of producing at home versus offshoring (vertical FDI). We conclude with a brief review of the global economic system.

In this chapter, we analyse the rationale of regional policies, discuss the evidence, and highlight some methodological problems. In doing so, we also take a closer look at policy consequences that follow from or can be linked to the models discussed throughout the book. In some of our thought-experiments, we take the models of the book literally and ask, what would be the lessons for policy makers? When we discuss actual cluster/regional policy thinking, but also when we discuss hypothetical policies by sticking as closely as possible to our models, there are always three main elements to take into account. First, whether it is a people- or place-based policy (or a mix of these two). Second, to go beyond the observation that a policy can change spatial economic outcomes by showing that a policy is somehow welfare improving. Third, to take into consideration the important macro/micro distinction in terms of regional policy effectiveness: a ‘good’ regional policy at the city or regional level does not necessarily imply that it is also beneficial for the economy as whole. The main message of the chapter is that regional policies should be handled with care.

In this chapter, we analyse the rationale of regional policies, discuss the evidence, and highlight some methodological problems. In doing so, we also take a closer look at policy consequences that follow from or can be linked to the models discussed throughout the book. In some of our thought-experiments, we take the models of the book literally and ask, what would be the lessons for policy makers? When we discuss actual cluster/regional policy thinking, but also when we discuss hypothetical policies by sticking as closely as possible to our models, there are always three main elements to take into account. First, whether it is a people- or place-based policy (or a mix of these two). Second, to go beyond the observation that a policy can change spatial economic outcomes by showing that a policy is somehow welfare improving. Third, to take into consideration the important macro/micro distinction in terms of regional policy effectiveness: a ‘good’ regional policy at the city or regional level does not necessarily imply that it is also beneficial for the economy as whole. The main message of the chapter is that regional policies should be handled with care.