The effect of foreign trade and investment liberalization on spatial concentration of economic activity

•I conduct a comprehensive study of changes in concentration of economic activity resulting from liberalization.•Developed countries with small market sizes tend to have highly concentrated economic activity.•Liberalization tends to increase the concentration but the outcome depends on market size and level of development.•Liberalization increases concentration more in developed countries and in countries with smaller markets. I examine the varying responses of countries to foreign trade and direct investment liberalization on spatial concentration of their economic activity by taking into consideration moderating factors such as their market size and level of economic development. I argue that liberalization increases the concentration under normal conditions but large market size, and underdevelopment can disperse economic activity. Using data from 168 countries for the period of time starting in 1980s, I found support for all hypotheses.