The home market effect is the clustering of an internationally traded sector in the country with the largest domestic market. It relies upon agglomeration benefits which means that firms see productivity improvements from clustering, and trade costs which firms choose their location in order to minimise. In the absence of agglomeration benefits, firms would all locate in their local markets and the sector would be associated with no imports or exports. In the absence of trade costs, firms would all cluster in one market, but would be indifferent about which market this was. With both agglomeration benefits and trade costs, an industry is likely to cluster in a country with a large domestic market and provide exports to smaller markets. The UK has a very large potential offshore wind resource, and the UK Government has produced plans for the growth of the offshore wind sector that imply increased UK content in the supply chain and an increase in UK exports from this supply chain. This looks like the home market effect in action. In this paper we use an Input-Output (IO) modelling approach to assess the direct, indirect and induced economic consequences of the development of the offshore wind energy industry and its supply chain for the whole of the UK economy. The results of this IO analysis provide the “data” needed to calibrate a trade model which allows for home market effects. This baseline calibration replicates the UK Government projection for the growth of the offshore wind industry (by construction). However, Brexit is estimated to raise trade costs with the rest of the European Union, and so we can simulate Brexit by raising trade costs, and ask the counterfactual question of whether Brexit increases or decreases, ceteris paribus, the growth of the offshore wind industry in the UK.
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